Are there better ways to pay for college than student loans?

at 03:20 PM ET, 04/11/2012

(Butch Dill/AP)
With college tuition rising even faster than health-care costs and overall student debt up to jaw-dropping levels, people are starting to dream up alternatives to the traditional student loan. Here’s one idea, courtesy of the Economist’s Free Exchange blog:

Students in California have a proposal. Rather than charging tuition, they’d like public universities in California to take 5% of their salary for the first twenty years following graduation (for incomes between $30,000 and $200,000). Essentially, rather than taking on debt students would like to sell equity in their future earnings. This means students who make more money after graduation will subsidise lower-earning peers.
It is not clear if this will provide adequate revenue for the university. It also means the university bears more risk, because the tuition it will ultimately receive is uncertain. But the proposal will benefit some students and the principle is not so ridiculous. … Why not price discriminate based on future income of the student rather than the current income of the parent?

Now, there are all sorts of potential hitches here. For one, students who want to major in the most lucrative fields — like computer science or engineering — might flee to other universities, preferring to take their chances with traditional loans.

Alternatively, under this system, university career counselors might find themselves with plenty of incentives to nudge existing students away from, say, nonprofit jobs and toward consulting and finance gigs. Or away from low-paying liberal arts classes and toward science and engineering majors. After all, the schools’ budgets depend on it. (Of course, many universities already have this incentive, since more high-earning graduates can give more in donations as alumni.) Whether that would count as a good or bad thing most likely depends on your view of the role of universities.

Still, the current system isn’t perfect, either. Students who are unlucky enough to graduate during a deep economic downturn — like, say, anyone who graduated in 2009 or 2010 or 2011 — take a huge hit to their lifetime earnings compared to graduates who had the good fortune of graduating in, say, 2003. But the student debt burden doesn’t adjust accordingly. So could there a better way of doing things?

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