INDIANAPOLIS | Can the nation's $1.3 trillion student debt burden be alleviated by permitting investors to purchase university educations for students in exchange for a cut of their future earnings?
Purdue University President Mitch Daniels believes such "income share agreements" may be part of the answer to making college more affordable.
The former Indiana governor told a U.S. House subcommittee Tuesday that Purdue is exploring opportunities for investors -- "perhaps devoted alumni," he said -- to pay for students to attend Purdue, if those students agree to pay the investors a to-be-determined slice of their post-graduation incomes for a set number of years.
"Such arrangements would create incentives for organizations to support students with mentoring and career counseling without putting tax dollars at risk," Daniels said, a Republican.
The concept of income share agreements is largely untested but not new. Nobel Prize-winning University of Chicago economist Milton Friedman, whose ideas Daniels consistently praised in his 2011 book, "Keeping the Republic," first proposed it in 1955 as a way to reduce the role of government in education.
Ironically, Daniels told the panel that widespread use of income share agreements will not be possible until Congress enacts regulations clarifying the legality of the practice and providing protections for both investors and students.
Ohio University economist Richard Vedder, who provided Daniels and the Indiana Chamber of Commerce research in 2011 supporting Indiana's adoption of right to work, explained in Forbes Magazine last week that income share agreements would direct students to in-demand studies while lowering the cost of college.
"Firms will assign risks to different schools and majors – and students wishing to forego less of their equity will gravitate to high-paying majors," Vedder said.
"Markets will give students information that would help reduce the monumental 'mismatch' problem that persists today, where huge proportions of college students take low paying jobs where most holders have high school diplomas."
Vedder also said income share agreements pass the risk of failing to graduate college from students, who then are stuck with likely unpayable debt, to investors, who will carefully pool the risk from many students to ensure net positive income flow.
Critics of the idea suggest income share agreements are dangerously similar to indentured servitude or sharecropping, because the investor has an ongoing claim to the student's income and might be able to insist students work a specific job to pay their obligation.
Opponents also fear only high-paying majors might be supported keeping college unaffordable for people interested in doing necessary, but generally low-paying, jobs that often require a college degree, like social work or teaching.