The Student Debt Crisis: Income-Share Agreements as a means to Finance Higher EducationBy TomMackenzie (2020)Critically examine the case of equity funding in higher education as discussed by Friedman. Do you think it has any relevance to Fiji's Case?

for private funding. Yet the simple fact of the matter Friedman also proposed the following solution: is that on aggregate. the tuition fees currently charged by institutions in the US and the UK do not reflect the monetary value of the qualifications conferred: gradu- The counterpart [ to equity investment ] for ates are increasingly unable to repay their loans. education would be to "buy" a share in an individual's earning prospects: to advance him The cause of the student-debt crisis can be explained the funds needed to finance his training on through economics. It is essentially a problem of mis- condition that he agree to pay the lender aligned incentives, Allowing universities to carol stu- a specified fraction of his future earnings. dents at their own discretion in exchange for tuition In this way. a lender would get back more fees received upfront means that institutions have a much greater interest in recruiting students than in pro- than his initial investment from relatively viding an education of any real value to them. In such successful individuals, which would circumstances a "bums-on-seats" approach to Higher compensate for the failure to recoup his Education is entirely rational for universities. They do original investment from the unsuccessful. not share in their graduates financial risk. Some may argue that this already takes place in coun- In 1955, the economist Milton Friedman foresaw the tries where higher education is publicly funded and the student-debt crisis, writing in his essay. "The Role of state operates a progressive system of taxes. Successful Government in Education". graduates then simply repay the "lender" state for their education through higher tax contributions later in life. The result is that if fixed money loans were effectively subsidising their less successful peers. How- made. and were secured only by expected future ever, as well as penalising prosperous individuals who earnings, a considerable fraction would never do not participate in higher education, such an argu- be repaid. ment misses the point of the need to realign incentives for the educating institutions, Universities would sure- INOMICS HANDBOOK 2020 ly welcome more public money but. quite apart from expected return is positive. This does not mean that it being unrealistic in the US and the UK given today's every graduate has to make a fortune. Rather, on aver- student numbers, it is unlikely to affect quality in the age, a funder's invested student should earn enough in classroom and thus do anything to restore the public fi- future to repay the cost of studying through the agreed nances in the longer term. Indeed, Adam Smith already rate (or dividend ). Neither the student nor the funder recognised this incentive problem in 1776 in his article. knows whether a university degree taken today will "Of the Expence of the Institutions for the Education pay off tomorrow. But the current system of student of Youth": loans places the risk of investing in Higher Educa- tion on the students' shoulders and ultimately on the Have those public endowments contributed general taxpayer who provides the bailout. Friedman in general to promote the end of their teaches us how better decisions about higher educa- institution? Have they contributed to tion would be made if the risk were instead shared be- encourage the diligence and to improve tween student and funder. the abilities of the teachers? Have they directed the course of education towards In particular. the funder will then have every reason to keep a close eye on the quality of the university's objects more useful. both to the individual courses. to encourage success in the investee student and to the public, than those to which and to suspend funding should either institution or it would naturally have gone of its own student fail to deliver. The funder will also have an accord? incentive to help students into lucrative careers when they graduate, a role that is currently thrust upon Friedman's equity-investment solution creates a direct "employability" officers (the fashionable name for link between the funder-who might be a public body careers advisers) at universities who often lack the or a private investor-and the student such that the resources to tailor advice and opportunities to indi