Rep. Tom Petri, R-Wis., and Sen. Marco Rubio, R-Fla., are shaking up traditional ideas about paying for college. Forget loan balances and repayment plans. How about just selling your future to a venture capitalist?
Petri and Rubio introduced legislation last week that would make it easier for corporations, nonprofits, or individuals to invest in students, literally. The bill would create a legal framework under which the student can agree to give the investor a portion of his or her earnings after college for a fixed period of time. The amount (5 percent? 10 percent?) and the time frame (10 years? 20 years?) is up to the individual parties.
The investor could strike gold by paying for the next Bill Gates to go to college. Or the investor could wind up gifting much of his or her original investment if the student winds up working in Africa for subsistence wages. What is certain about this arrangement is that the student won't default. It's impossible to ruin his credit based on how much he owes. This could be a game changer, considering that in 2012, 600,000 borrowers had defaulted on their student loans within three years.
"It's not a loan. You don't necessarily have to repay the money," said Petri, who has for years advocated income-based repayment options for student borrowers. "A lot of people who are unsure as to what their earning prospects are, who are fearful of assuming a lot of debt, they might think this is a golden opportunity."
(Petri is retiring from Congress this year. But there is still time for his provision to get inserted in to a higher education bill.)
Rubio, who owed $100,000 in student loans when he was sworn in as a senator just three years ago, believes these kinds of ideas are key to encouraging debt-averse people (perhaps unlike him) to take a plunge and try going to college. Higher education can't just be for the people who can afford it right now. Rubio outlined a number of those thoughts in a speech sponsored by National Journal in February. "There also has to come a point where quality and affordability meet. We simply cannot continue to price people out of higher education," he said.
Some entrepreneurs are already creating these kinds of contracts. Pave.com and Upstart.com are two examples of organizations that partner investors with young people who are trying to start their careers or their own businesses. Sometimes, what those people need most is to get rid of their student debt.
Petri says that many more organizations and individuals would pursue these kinds of college financing arrangements if they could be sure that the payments they receive from the students would be given fair treatment under the tax code. Rubio and Petri's legislation would provide some certainty on that front.
But more importantly, Petri and Rubio are hoping to create an environment where policymakers will think differently about what it means to invest in education. The current student loan system is lopsided, with the biggest financial burden affecting students when they least have the ability to deal with it—right after they graduate. Rubio and Petri's idea, along with tying traditional loan repayments to income and making the cost/benefit analysis of college simpler, could begin to turn the college financing system upside down.
For our insiders: What are the advantages of Rubio and Petri's proposal? Who would be most attracted to this kind of contract? Is this a game changer in the world of college funding or a mere tweak in the system? Is it appropriate for investors to be looking at prospective college goers as a future source of income for themselves? What are the problems, generally, with income-based repayment?
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