Education: Turning a Debt Market into an Equity Market

Education: Turning a Debt Market into an Equity Market

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Originally published on Medium — June 16th, 2016


Here’s the thing. I don’t profess to be an economist (or a zoologist, but that’s for a different reason). I don’t know every issue that is wrong with education, but I think a conversation I had last week included a thought worth thinking, and one worth saying (which are not always the same thing, some people could benefit in better understanding the difference.)

For those of you who read the title of this and still aren’t sure what I’m talking about, let me explain. Student loans represent a $1.3 TRILLION marketAccording to the World Bank, that is larger than the GDP of 175 countries, including Sweden, Colombia, Mexico, and Denmark. There are only 14 countries in the world with a GDP larger than that. I had to google how many zeros are in a trillion just to make sure I wasn’t reading this wrong. That is a drastic amount of debt. And it’s going up. The average student debt has increased 56% in the last 10 years. And that Fortune article talking about this increase? It still tells you to go to college regardless: “Despite rising debt levels, a college degree is still the best path to a job and decent pay.”

And I don’t think student debt is going anywhere anytime soon because it is immensely profitable. Sajay Samuel explains this pretty well in this TED Talk, but for a summary of this type of profit, check this out:

“Student debt is profitable. Only not on you. Your debt fattens the profit of the student loan industry. The two 800-pound gorillas of which — Sallie Mae and Navient — posted last year a combined profit of 1.2 billion dollars. And just like home mortgages, student loans can be bundled and packaged and sliced and diced, and sold on Wall Street. And colleges and universities that invest in these securitized loans profit twice. Once from your tuition, and then again from the interest on debt.”

The U.S. bond market is $39.5 trillion and it didn’t really go anywhere, even after lending to a global financial crisis, so why would anyone want to get rid of something as profitable as student debt? (Side note: Some economists and regulators have drawn parallels to the mortgage crisis when talking about the trajectory of student loans.)

I’m not arguing that student debt is bad or good. For some, it makes it possible for a lot of people to access education in a way they might not be able to. But, like Professor Samuel explains in his TED talk, education has become a consumer product.

Students have become commodities, and companies that produce commodities can borrow money and/or receive investment. My question is, why can’t students accept the same kind of investments? Why can’t I be the company that is creating the commodity? After all, the commodity is me!

In fact, this isn’t really a new idea. There are contracts in place for this, they’re called income-share agreements where investors take a percentage of a student’s future earnings in exchange for their investment to pay for college. Milton Friedman talked about them in the 50’s and legislation was presented recently to try and regulate these agreements, setting limits like 30 year caps and 15% shares, and defining these agreements specifically as NOT loans.

In fact, an organization called Lumni is already doing this. Back in 2011, they had these stats: “150 individuals and corporations have invested $17 million in its funds. Only 2 percent of students have defaulted on their repayments.”

To date, they’ve funded 7,000 students, mostly in developing countries like Mexico and Colombia (though growing in the U.S.), receiving anywhere from 5–15% income-shares.

This puts a whole new spin on the phrase, “investing in our students.” Granted, maybe this is starting to sound like indentured servitude. But if you ask any entrepreneur who has raised venture capital, sometimes their relationship with their VC can feel a little bit like slavery.

And I’m not here to argue the economics of these agreements. Instead, I want to focus on the impact this could have on the way students view their lives.

I’ve talked about this before, you should see your life as a business, and our lives are a lot more like a startup than we sometimes acknowledge.

Different startups operate in different industries. Students are interested in different things. And there are investors who might be specifically interested in students within those different “industries.” A famous artist may be more interested in investing in art history majors, while tech moguls are looking to invest in CS and engineering majors.

Instead of thinking of college as a passive experience, students will recognize all of the things they do as traction. Their high school extracurriculars, grades, ACT/SAT scores, all of these are traction that students can use to tell as story to an investor. And that is a key: it doesn’t always have to be about getting the BEST of all of these things, because that tells the same story: You’re good at studying. Instead, a combination of Model UN, volunteer activities, and a solid 3.7 GPA shows an emphasis on taking the time to understand the social sector in an active way, being willing to trade off some grade points for practical experiences, rather than understanding it in a theoretical way. THAT is a story you can pitch to an investor.

This kind of emphasis could also change the way we teach. When you’re in high school, instead of thinking you need to just remember the fact, pass the test, and move on, you’re thinking about your customer i.e. the people who will pay you money (employers, sponsors, or even ACTUAL customers when you use your education to start a company). Taking different classes would be like looking for a market. Talking to people in the industries you’re interested in would be like talking to customers. Figuring out your life plan would be like a business model. Understanding how much you’ll make, how much you need to save, and what things you should spend money on (coding or art classes, a trainer or tutor, etc.) all of these things make up your financial model.

Granted, the level of risk might be a concern for some investors. It’s all fine and dandy to invest in a student’s future. What happens if they decide to run off and “find themselves?” But the paradigms for these risks have already been considered in the startup world. What if you invest in a founder who decides to run off and “find themselves?” That’s the purpose of due diligence, long-term planning, and getting to know the “entrepreneur.”

Even more interestingly, on the other side of the coin, the impact this kind of agreement could have on an investor’s incentive to help the student could be life-changing.

Two years ago, I was doing a semester abroad at Cambridge University in the U.K. and I took a trip to see a professor at Oxford in the Saïd Business School. I talked with him about the types of apprenticeships you see among tradesmen and the possible implementation of that kind of program in other industries: finance, strategy, politics. His response has always stuck with me:

“Apprenticeship is incredibly valuable. But there is a level of complacency in the world and that’s because people just feel too busy. They don’t want to do the things they have to do and if you ask them to do more, I don’t think they’ll do it. There’s a lot evidence that mentoring doesn’t work at the corporate level. In an educational environment, my impression is that faculty members do less and less [mentoring]. You’re not rewarded for doing it. At some level, it feels like I have some mentoring relationships. I’m willing to be a good teacher, but it’s not clear to me that young people are going to return and report. It has to be a quid pro quo. If the students are just taking and not making it valuable for the mentors, the mentors are not going to do it. If we’re talking about mentoring, there needs to be give and take. I don’t see where the mentors are going to get compensated.

With income-share agreements, the investors become financially incentivized to help the student succeed, their compensation, or return, is based on that student’s success. And the students become incentivized to “return and report” on their progress to their investors, hoping to get support and feedback. You might be thinking about the risks of the investors pushing the students to become something they don’t want to be. But again, this is already something people think about in the startup world. What if I take money from a VC and they push me towards enterprise sales instead of consumer-facing? Part of the solution to this comes in the due diligence, part of it comes in taking on the right investors, part of it comes in focusing on data and understanding what makes the most sense for the student based on their interests as well as the job market, the future of certain jobs, all of that.

And taking on student investment doesn’t mean you can’t take on debt. Much of the discussion with income-share agreements revolves around them acting as supplementary to student debt. That is exactly how it works in business, you determine your company’s appetite for debt vs. equity investment based on several different considerations.

And I think that is the point I’m trying to make. People should be more thoughtful about their life, ESPECIALLY when they’re young. We shouldn’t have helicopter-parents planning their students lives, we should be teaching them the principles they need like Lean Startup and ‘Nail it Then Scale it.’ Each person should be planning their own life and leveraging their parents just like a startup would leverage an adviser!

In the 70’s, 80% of a company’s value was based on their tangible assets (factories, property, equipment). Now? 80% of that value is based on intangibles, and a big part of that intangible value is the people working in those companies. If companies are discussing ways to really understand the value of their employees, I think its definitely time that we, as people, start thinking about our own value and start making the decisions to maximize that value.

Titles like entrepreneur and innovator need to start applying not just to the creators of products, but to individuals who are building up people, especially those of us who are building up ourselves.