Marco Rubio rehashes proposal to let students sell themselves to investors

In today’s sharing economy, I guess it was only a matter of time.

In a speech on Tuesday, Marco Rubio called for letting students fund their education by letting private companies and individuals invest in them.  The student would receive a loan from the individual or company, which would then be entitled to a percentage of that student’s income for a set number of years.

He also called for a loosening of accreditation requirements for colleges, opening the door for an increased reliance on the ineffective scams that many for-profit and online universities are.

This isn’t the first time Rubio has called for opening up student incomes for private investment, which conservatives consider to be an attractive way around current issues with student loans. And on its face, it seems to solve one problem: the risk of college costs is placed on the investor. The student is only on the hook for the agreed-upon percentage, regardless as to whether the investor recoups all of their money.

Except there’s practically no risk for the investor. The standard example given in Rubio’s proposal is a $10,000 investment in a student that returns 4% of that student’s income for the first ten years after graduation. Under this arrangement, the student only has to average $25,000 per year in earnings in order for the investor to break even. They might as well take a job at McDonald’s.

That aside, the profit interest behind the plans creates a set of perverse incentives. As Alice Ollstein at ThinkProgress wrote:

But these “Student Investment Plans,” which also have the Orwellian name “human capital contracts,” raise many serious concerns. For one, investors may refuse to cover entire fields of students not likely to bring in the big bucks after graduation, or would charge them a staggeringly high percentage of their income…

…The National College Access Network and other groups have warned that such a plan could cost students even more than high-interest federal loan programs, diverting away money those graduates could have used to save for retirement or buy a house.

What’s more, the contracts between students and investors could easily be written in such a way that students would be prohibited from switching to a major deemed to be “lower-value.” Decide you don’t actually want to do pre-med after your first year? Tough. It doesn’t matter how interested in or good at anthropology you are, it won’t turn a profit for your financier, who invested in a future doctor.

Marco Rubio, via Gage Skidmore / Flickr

Marco Rubio, via Gage Skidmore / Flickr

Given the nature of private investment strategies, it’s also likely that we would see the same kinds of bundling and permuting with loans to students as we saw (and currently see) with home loans and other financial products. Again taking the 4% x 10 year return on a $10,000 investment as the baseline, a graduate averaging $60,000 in earnings per year returns $14,000 in profit. Certainly not nothing, but pocket change in a financial system in which investors are used to playing with billions, not thousands, of dollars. This means that rather than taking the time to “vet” the students in which they want to invest, firms will likely invest in “bundles” of students and sell those bundles based on the likelihood that the bundle will, in aggregate, turn a profit. As noted above, that likelihood is essentially 100%, meaning that the bundles will sell for more than the sum of their individual student loans — the makings of a speculative bubble.

This would likely not be the case in a public version of the same idea, which Oregon is considering in its “Pay it Forward, Pay it Back” proposal. Structured much in the same way, but without the for-profit interest setting perverse incentives, the basic principle of pegging student loan repayments to the student’s ability to pay — as opposed to the increasingly high cost of college — would be a major lift for students who would otherwise struggle to pay for their education.

Just don’t look to the private sector to provide that lift.

Jon Green graduated from Kenyon College with a B.A. in Political Science and high honors in Political Cognition. He worked as a field organizer for Congressman Tom Perriello in 2010 and a Regional Field Director for President Obama's re-election campaign in 2012. Jon writes on a number of topics, but pays especially close attention to elections, religion and political cognition. Follow him on Twitter at @_Jon_Green, and on Google+. .

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