Bad Idea of the Day: College Venture Capital

Sometimes, people will concoct ever more elaborate proposals as a way of avoiding what is directly in front of their faces. Case in point: today’s New York Times op-ed by Luigi Zingales in which he proposes scrapping federal student loans in favor of using private venture capital to fund student’s studies. Zingales proposes that venture capitalists should subsidize students’ cost of attendance at college, in exchange for the graduates then giving the venture capitalists a slice of their future income.

What Zingales is proposing is essentially a greedier form of what was proposed in the UK by the Liberal Democrats during the 2010 election campaign. With tuition fees at English universities capped at £3,300, the university sector was getting most of its funding from the UK government (as late as the 1990s, tuition was entirely state-supported). The Lib Dems proposed that tuition fees remain at £3,300 in order to avoid pricing out lower-income students, and that additional revenue should be raised through a tax on graduates’ incomes. The Lib Dems discarded their proposal as the price of coalition with the Conservatives, who proceeded to triple tuition fees to £9,000, which goes into effect this autumn.

One of the few merits of the Lib Dems’ plan was that it was entirely public. The up-front money to cover the cost of education was provided by the state, and the graduate tax would be paid directly into the public treasury. There was no private-sector middle man skimming profits off of the top, nor was there pressure on students to study monetarily-rewarding subjects. The biggest downside, which was most responsible for the proposal’s defeat, was that collecting the tax was logistically impractical, as it would involve chasing down graduates throughout the EU and the British Commonwealth to pay for their educations, a process that would require as much expense as the tax itself was worth.

No such merit can be found in Zingales’ plan. It would provide funding for education purely based on the profit to be gained by the graduate’s future income, a sure-fire way of directing students into the finance and business majors that have already re-directed the nation’s talent from other equally-pressing but lower-paid sectors. He would also deputize the IRS into becoming a private collection service for the venture capitalists. This is a shocking blurring of the line between public and private. “Usurpation” of the IRS’s public function is really the proper word here.

Zingales is right when he points out how much federally-subsidized student loans have distorted the market for education. But the solution is not elaborate venture capital schemes that he lamely asserts will not become a “modern form of indentured servitude”. Nor is the solution the corruption of a public agency for private profit, as Zingales so casually suggests.

The solution is to do what already works: to properly fund the public universities, coupled with the restriction and regulation of student loans. Education is not getting more expensive because it suddenly became more expensive to hold a seminar. It’s getting more expensive because of bad public decision-making. Every dollar cut from a public university’s teaching budget is a dollar that must then be loaned out to the student, at interest. No money is saved, but somebody controlling the purse strings makes a profit.

The simple truth is that it would be cheaper to just fund the public universities up front rather than construct elaborate and inefficient mechanisms to avoid that essential cost. In addition, student loans should be properly regulated so that they can only be used at non-profit educational institutions, re-directing this free money away from the for-profits whom Zingales rightly criticizes as producing useless degree-holders. This two-part proposal is simple and direct: in other words, it is efficient.

To miss the obvious simplicity of simply paying for what you want suggests that Zingales is blinkered by neoliberal free market ideology. This is what Zingales has in front of his face but refuses to see: college is only unaffordable if we assume that the individual alone must pay for education, rather than treat it as a public good. This is a decision that reflects our values as a society; it is only an issue of economics once we make that judgment. Treating it otherwise is a waste of time and money.


About Daniel Clinkman

I recently completed my PhD in History at the University of Edinburgh. My academic interest is in the transition from feudalism to liberalism in early modern Britain and its empire. My non-academic interests include public policy, political thought, international politics, social institutions, and travel. I grew up near Boston before attending the American University in Washington, DC. I now live in the San Francisco Bay Area. Follow me @dclinkman on Twitter.
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