F COLLEGES PROVIDE VALUE, then let’s make them warranty their offerings. Make the colleges be the lenders—responsible for the loans they approve. Goodbye to Uncle Sam, his tuition-inflation program, and his support for colleges that don’t offer value.
In order to be able to lend, colleges would need to capitalize their assets, such as their endowments and all of the human capital represented by their graduates’ future earning power. This would be a useful exercise for those institutions that haven’t been paying attention to the value of their products. The quality of classes they offer could improve and become more relevant as a result.
Some colleges might reduce the variety of degrees they offer, while other colleges might specialize in fields of study that attract cash-based or independently financed students.
Lending colleges ought to improve their career counseling to manage their new risky assets—the students. Students might also receive other benefits, such as more and better placement services through alumni or local businesses, since the colleges would have vested interests in their success.
An additional feature on the proposition for colleges as lenders could be to offer adjustable-rate debt agreements based on students’ final grade-point averages. Rates could be discounted for grades at or above B average and raised for lower grade averages. Students should find a direct incentive to invest in academic success.
An equity-conversion option could also offer students protection for times when quality employment opportunities aren’t plentiful for their degrees. College lenders could grant an option to graduates for an equity conversion within the first three years after graduation.
Exercising the option would convert a student’s fixed debt payment into a fixed equity interest for a lender, such as a claim on 10% of the student’s income for the next 20 years. Over a couple of decades, payments from highly successful students who converted should offset low payments from those less successful. These equity conversions could provide colleges with a form of automated endowment growth.