Why an educated population is a public good

Last month, Matthew Denhart described the current (and very small-scale) state of privatized student-loan microfinance, something Richard Vedder jumped on when Warren Buffett mentioned the idea last year: turn student debt into equity in students. This idea addresses my concern expressed a few years ago (it's towards the end of that very long entry) that the domination of tuition funding by privatized debt eliminates any of the advantages of shared risks/rewards. Change debt to equity, and at least in theory, the game changes dramatically. (This is one of the few areas where I agree with Vedder on an interesting new idea.) 

Regardless of what you think about it, though, the equity-in-humans proposal has one central flaw: it is vulnerable to cohort effects. At any time, if you're "investing" in a college student who graduated recently from high school, your risk/opportunity lies partly in the individual circumstances of the student but partly in the experience of your "investment vehicle"'s birth cohort. For those who left school in the last few years, whether it's high school or college, the lifetime earnings are likely to be lower on average than for those who start careers in better economic times. Large "investors" can manage the individual-to-individual risk by investing in lots of college students, but that diversification doesn't address the cohort risk. 

I hope someone figures out a way to address the problem, because it would be better for students to be able to supplement federal loans (which can be rolled into an income-based-repayment plan later) with a "human capital contract" or whatever term someone figures out for the concept. In general, it's best to think about these structures as complementary rather than competing with each other. By itself, microfinance is not a way out of poverty for billions, but it's a tool. Same with the parallel for college students.

Obligatory overgeneralizing-from-personal-experience paragraph: My experiences in microfinance are generally in Kiva. I think the loans my wife and I have made through Kiva have a 100% payback record, and we've tended to give to women over 30 who already have successful small businesses and are looking for microloans to maintain or moderately expand their businesses. If there were the Kiva equivalent for higher-ed, I'd probably be inclined to loan to the student equivalents: older college students who have a recent track record of good grades. Someone who was just placed in a developmental math course right out of high school? I'm not biting. A 32-year-old parent who's just finished one semester of a full load at community college with A's and B's? Sign me up for some equity in her or him! 

If my personal inclination is common (and that's a reasonable but not inevitable if), think about the consequences: in Vedder and Denhart's human-capital equity market, someone who has a track record in college is going to be seen as a better "investment" than students who need much more assistance of different varieties. Filling the gap requires public investment in higher education (especially community colleges and public four-year colleges and universities). And while Ezra Klein's musings on Facebook as a reason to invest in the population as a whole was on the whimsical side (and taking advantage of the Facebook movie), he's also right: private investment will be attracted to individual enterprises. But the underlying education of the population is a public good, or infrastructure as Klein puts it. 

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