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Mutual funding for Higher Education

Posted by Jock Coats on 20th April 2011

It has come as little surprise to me, given my prediction in December last year, that so many universities have chosen to charge the highest allowed fees of £9,000 a year under the government’s bugger’s muddle of an Higher Education funding system.  So for another little prediction – either the system will not see its way to implementation in the current form, or, if it does, it will have to be reviewed within a couple of years.  In other words, it’s not even going to be as stable as Dearing.

But, assuming it does come into effect, and assuming it, or something similar (perhaps without a cap at all) remains for the foreseeable future what can be done?  There has, after all, been much discussion about the notion that Higher Education is a “bubble” about to burst, particularly in the US, where student loan debt now outstrips the aggregate total balance of credit card debt.

If you look around the American Higher Education scene, many of those institutions that were around in the depression have student housing co-operatives, credit unions and so on attached.  These arose as a mutual self-help response to the challenges of funding Higher Education in the Depression, and perhaps they point the way to a possible future for helping fund UK students through what will now be a significantly higher investment in themselves than previously.

There are, indeed, all sorts of possible answers.  In Capitalism and Freedom, Milton Friedman posited the idea of selling shares in yourself in return for investment, with the idea that you would slowly buy back the shares as your income grew as a result of the investment.  This idea is taken to extremes in the recent “libertarian” science fiction books The Unincorporated Man and the Unincorporated War.

Friedman has a more fundamental point that the government’s proposed system does not take into account, and without which it will inevitably create more perverse incentives.  Because, in our case, student funding will come from the government up front, it is not competing with investment in other kinds of capital.  The normal way of telling whether an investment is worth making is its predicted rate of return against better or worse competing potential returns from other investments you might make with it.

But, since they’ve messed around with the graduate contribution terms so it does not look like any normal kind of a loan, and since the money is, if you will, a separate pot that cannot be used for alternative investments, these signals will not be apparent.  And that lack, at least as much as the general current lack of low cost competition for universities, means there are no real signals as to whether individual institutions have got their prices right from the perspective of the customer.

Anyhow, one thing we could do is look to find ways of bypassing the new state backed financing system.  Now sure, in the US, one of the big problems about student loan debt is that big chunks of it is borrowed from distinctly dodgy lenders; preying on the bubble mentality of people desperate to get a degree in case they lose out for the rest of their lives, some of these are more akin to loan sharks or sub-prime mortgage providers than investors in peoples’ futures.  And this points back to the mutual institutions established to help people get through higher education in the Depression, the university credit unions.

I did actually propose this idea a decade ago now, as a way of enticing and retaining graduates’ financial involvement in the university.  Accepting that not many alumni are capable or willing to make large monetary donations, I wondered if they could be enticed into putting some of their savings into a university credit union, earning interest, whilst at the same time assisting subsequent students with low cost financial aid.

In the intervening years I’ve been introduced to different possible mechanisms, such as the JAK Members Bank in Sweden, and the idea of using Open Capital Partnerships as a less “toxic” equivalent of Friedman’s incorporation idea mentioned above.  Here in Oxford, a small city with two large higher education institutions in many ways dominating the local economy we could fold these ideas into a local currency as well – after all, I’ll bet between the two universities here we spend a significant mount of money purely within the local economy.  Perhaps some of the money from student fees could provide the “value backing” for such a complementary currency.

With the JAK (pronounced, appropriately, “Jock” with a sort of a “J/Y” thing going on) system, you would expect incoming students to have saved a little bit of money in the system being run by their chosen university (or perhaps a bigger one covering several universities), they then apply to borrow sufficient to pay their fees, their living costs, or whatever part of it they want to do this way.  All the while they pay a membership subscription, but once they graduate and are earning they start to “save” again within the scheme, eventually wiping out their debt and having a positive balance which within the system is used for new borrowers (or, after a stipulated time, for them to withdraw and end their relationship with the system).  It is interest free, but the membership fees and the lack of interest on positive balances do represent a sort of hidden opportunity cost.  So the JAK system is roughly a credit union with fees rather than interest.

The Open Capital Partnership would be more akin to Friedman’s idea of investing in individuals as shareholders in an incorporated business.  Except that using a limited liability partnership type structure you can remove the notion of an investor “owning” the “investee” and instead think of it more as the investor having a stake in the additional “profit” (i.e. income) after graduation the student makes until they buy out the investor partner.  I think this one is the more attractive solution, both for investors and investees, as investors do get a positive return whilst investees get potentially a greater say in how and when they buy their investor out.

I would do the math at this stage, to see how it works out against the government proposed system, but that would be to give the entire game away.  If you like the idea and want help working it out, I shall do a bit more work on it.  But for now, it’s just an idea, a vague notion.

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