A Modest Proposal: Students Refuse To Become Debt Slaves, Opt To Sell Equity In Their Future Wealth Instead

Tyler Durden's picture

The topic of the student loan bubble (and even its popping) has been digested to death on Zero Hedge. One topic that has been avoided however, is that of the student equity bubble, for the simple reason that until now the concept did not exist. That may change soon: as the Economist reports, some California students have a modest proposal to the symbiotic University-Banker net worth extraction mechanism - shove your debt. Instead, they will pay for their unaffordable education (except when funded with copious amounts of unserviceable and non-dischargable debt) with equity.

From the Economist:

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 only makes sense - with every firm now scrambling to go public, no matter how worthless, and take advantage of the latest raging excess liquidity bubble, even at the risk of flash crashing before the first trade is executed, why should individuals not be treated like corporations? And, taking it further, why not have the option of what capital structure one would grow into? Simple - because equity is associated with upside appreciation, while debt is much more focused on capital preservation. And while the American Dream teaches everyone, students especially, to believe they can achieve everything and anything in the USSA, but only if they get $100,000 in student debt first, everyone knows this isn't happening. Which is why there just happens to be a double standard when it comes to reinvesting other people's money. In essence: both university and bank would be exposed to unlimited downside, which as we all know, is a viable option only if the banks know they will be bailed out should things turn sour.

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. American universities already practice price discrimination based on parental income. The more money your parents have the larger your tuition bill; richer families already subsidise poorer ones. Why not price discriminate based on future income of the student rather than the current income of the parent?

 

It also means, in many cases, that degrees that command a higher value in the labour market, like engineering or computer science, will cost more than other degrees, like theatre arts. But if an engineering degree is worth more shouldn’t it cost more? If you think of a degree as an asset which pays dividends in future wages, the asset with a bigger expected pay-out should cost more. Faculty in high-value fields tend to get paid more. Perhaps some of that cost should be passed along to the students.

But think of the arbitrage over majors? One could have an equity funded double major in medicine and accounting, while taking out debt for those blue light special minors in sociology, psychology, English, and everything else actually taught in liberal universities.

Incentives would also change; maybe university departments would become more invested in producing sucessful graduates. But might this undermine the mission of American universities, which is (or is often assumed to be) to provide a well-rounded liberal arts education? If universities become more income focused, will low-yielding, but socially valuable fields like philosophy wind up short of resources? To some degree, the university-for-all model already undermines our idyllic version of university. As more of the population goes to university, and must pay for it, more esoteric subjects naturally become less popular.

 

A trickier concern may be what happens if this approach is not implemented everywhere? If you know you will study engineering and earn a high salary wouldn’t you then opt for a school with a fixed, up-front cost—assuming that means you’ll come out ahead? Then would all the talented engineers go to other universities and potentially undermine California schools?

So unfortunately, while this is a creative idea, its chance of success is zero. Especially since not only the student "equity" market is dead, but now JPMorgan, as we first noted 3 days ago, is quietly getting the hell out of Dodge University. Ironically, the best option for everyone involved is for the student loan bubble to pop and for college to be equitably priced. Alas, that will never happen as long as the Fed and the government are actively engaged in defining the price of money and the opportunity cost of declining to become a 22 year old leverage mule encumbered with enough debt to last a lifetime.

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RmcAZ's picture

5% of what salary?

junkyardjack's picture

I can't wait to walk to a bank and see "We Accept WIC Checks"

idea_hamster's picture

students would like to sell equity

So is this going to get counted in that "Insider Selling/Buying" statistic?  I mean really -- talk about holding material non-public info during a period when you're off-loading your common on someone else!

As long as it's not tax-payer guaranteed, then fine -- but it will be.

SilverIsKing's picture

The primary difference between this idea and what is currently in place is the drop to 5% of salary from 100%.

 

Comay Mierda's picture

cant wait to see the banksters trading kids on the NYSE.  oh and the derivatives will be interesting.  want to buy a call option on a valedictorian? or a put on freshman skipping out on class to do drugs?

or pool these bitches up.  maybe they can sell shares and tranches on the Harvard class of 2012?

Now the banksters will literally own kids.  any parent out there that allows there kid to sell "equity" is fucking crazy.  this is a BIG sign of a breakdown in society

Peter Pan's picture

How soon before kids are allowed to sell a kidney?

TheTmfreak's picture

Indentured servants anyone? I like how these assholes keep thinking they're "progressing" things but just keep rehashing the same fucking stupid ideas already resolved hundreds of years ago.

Vampyroteuthis infernalis's picture

Universities are all about indoctrination. Who are we kidding. No progressive ideas here. Nothing but Marxism.

TruthInSunshine's picture

It's very simple. As more and more people awaken to the notion of modern day debt slavery, the fractional reserve banking charlatans & snake oil pitchmen prime the pump in more creative and desperate ways in an effort to discourage people from opting out of debt slavery, which, if enough people did do, would slay the Ponzi economy built on a Pyramid of illusions we now have (and it's not that high of a percentage of people opting out of debt relative to the total population that would induce the collapse of the system).

 

Has anyone/everyone noticed how car dealerships, home builders, mortgage companies, credit card companies and other entities are dishing debt dope to even the deadbeats again?

They have to, in order for the Ponzi of an economic structure that is what fractional reserve banking (with bailed out, and soon to be bailed out again, wards of the state - sucking on the taxpayer teat - at the center of the scam) to Ponzi onward.

Here's just one example of how rotten to the core the Ponzi has become: 

FHA Reconsiders New Rule on Lending to Those With Debt

NEW YORK (MainStreet) -- The Federal Housing Administration has delayed, and will likely revamp a rule that says consumers with more than $1,000 in "collections debt" cannot get a federally backed mortgage. The FHA has put the rule on ice until July and is weighing changes to it as well, the agency reports.

If you read that article, are you surprised that the FHA, which is essentially a taxpayer backed guarantor of mortgage debt, and the world's largest mortgage guarantor (guaranteeing 36 million mortgages), is now under pressure to loan money to people with terrible credit scores, who not only have a wretched history of paying back past loans, but who currently (i.e. at the time they're applying for a mortgage) are in default in loans they had agreed to repay?

This is how the system eats itself. Fractional reserve banking can't perpetuate itself if larger batches of debt aren't issued and devoured by successive waves of greater numbers of people taking on greater amounts of debt (with already net negative worth taxpayers being put on the hook for the default risks - and the risk is more aking to an inevitability).

The refusal to take on greater amounts of debt on the part of larger participants in the economy, with trends such as this case of students at California colleges and universities, is how the fractional reserve banking Ponzi system is killed.

Bring it on. The sooner we get back to true supply/demand economics, true price discovery and equilibrium, the sooner we can shake off the fractional reserve banking charlatans and the parasites who they enable.

A Nanny Moose's picture

Tulip bulbs have more brainpower, and a better memory of history.

oddjob's picture

Never, but Hospitals will gladly take organs from your near dead body and profit with them.

Miffed Microbiologist's picture

Gosh, hard to guess the next step to all of this.....Hunger Games?

Trimmed Hedge's picture

"want to buy a call option on a valedictorian? or a put on freshman skipping out on class to do drugs?"

 

Hell, I'd write that put.. Ya never know...  ;)

theMAXILOPEZpsycho's picture

This is a fantastic idea. My masters degree in drama/feminism studies was something I undertook due to the most virtuous of moral principals: equality being the absolute moral right of all human beings. Someone who cynically decided that maths or engineering pays more so I'll do that has absolutely no right to take all the pie in the job market after graduation. Now I earn a good salary regulating small businesses for the government; yet I can't help looking at engineers, mathematicians, and worst of all speculators and entrepreneurs are earning for more. Any just society would seek to readdress the balance.

magpie's picture

Why, i'm even thinking of petitioning the EU parliament to lower all men's wages to women's. If there should be austerity, it should at least accomplish a noble goal. /sarc

Miffed Microbiologist's picture

Did you forget the /sarc ? You can't be serious.

smiler03's picture

Sigh. No problem reeling in the suckers though I think you've pushed it too far too soon.

HelluvaEngineer's picture

I like to think of people in terms of how useful they would be on a deserted island.

Rainman's picture

don't bother... I understand they're all edible

Offtheradar's picture

People generally suck, me included.

ElvisDog's picture

Ginger, Mary Ann, totally useful. Mrs. Howell, not so much.

Bobbyrib's picture

LOL, I agree with your point (it has to be sarcasm), except with including speculators with entrepreneurs. People that speculate and drive up the cost of living for everyone are scumbags.

Captain Planet's picture

@MAXILOPEZ

this makes little sense on a lot of levels.....

exactly how does your advanced in degree in BS qualify you for a higher payscale?

regulate me all you want, I'm the one with an idea to transform local economies and reduce the number of families on food stamps. and I'm the one who is going to build it myself....and you think you should be earning more than me? how 'bout this, I'll buy you a drink.

Vampyroteuthis infernalis's picture

CP, most who attend lesbian studies can't even pass introductory engineering courses.

Ura Bonehead's picture

This is a fantastic idea. My masters degree in drama/feminism studies ....

Let me see..... 5% times.....  Times 20 years....  Yes, the equity on that degree path has to be worth, what?  $200 at least.

P.S.  I took a number of years of practical pass/fail lab work in 'female' studies while in college.  Is that the same thing???

CrashisOptimistic's picture

Who is going to fund TODAY's faculty salary waiting for this uncertain future cash flow to arrive?

Sokhmate's picture

they fund themselves, of course. Or just quit facultying.

kall's picture

Still, this is a controversial measure, it should take me a while to figure out it's real implications. There's a new trend of students studying online to avoid student loans, we should take the online environment into consideration in this kind of debates.

Arnold Ziffel's picture

Off Balance sheet equity I suspect.

 

However, Universities now have a stake in the game...or whomever loans the moolah instead of handing it to any warm body that they pull into the loan office no matter how lugubriously droll their chances of landing a job are.

SheepDog-One's picture

Its got to be a frightening proposal for the colleges themselves...it would mean their graduates would actually be qualified and would make money. We all know how thats been going for grads over the last few years...move back in with the folks and cross fingers for that Walmart job.

easypoints's picture

Exactly. With all of your debtors paying 5% of 8.50 per hour, it's hard to stay in business. The useless degrees and the deploma-mills should quickly fall off the map. Creating qualified and productive graduates will actually be reflective of college revenue, rather than pumping out as many unsuspecting debt-slaves as possible.

Robot Traders Mom's picture

It makes sense on the surface if this is a contract with a university and they want to stand behind their education, but the Economist is the mouth for the Bilderbergs/Trilaterals, etc.

 

Surely this will turn into a casino.

Azwethinkweiz's picture

Altucher posted a blog the other day about going to business school, he wrote:

"Business school classes are junk. How do I know this? Because I took some. I stopped showing up at classes, I didn’t do the homework, I’d get a C- on the Final andwhat would my final grade be? B+. Why so high? Because business schools want you to have high grades so so you can get great jobs so they can advertise that all their students work at GoldmanSachs now. They wouldn’t want to say the opposite: that all their ex students now work at gas stations. So the actual education is BS."

Would it be any different? We'd have corporate sponsored schools pushing their graduates to work for the sponsor(s). Surely we could pump out a couple thousand kids to sign false mortage documents and push them from one side of the desk to the other and take a hefty six-figure salary in doing so to subsidize those who do work at the gas stations.

If it doesn't turn into a casino, it'll turn into a 3 ring circus.

aerojet's picture

I learned this about B-schools pretty fast--it's not about the classes, it's about the connections!

dwayne elizando's picture

I'm waiting for the day when Wal-Mart, JP Morgan and McDonalds all merge to become McMorgan-Mart.

TheSilverJournal's picture

The federal government has already done it and it's called wal mart. Food stamps are used in the wal mart grocery store (as well as social security and unemployment checks), obamacare at the pharmacy, and the wal mart bank, as all banks do now, only exist because they're fully supported by the government printing press.

krispkritter's picture

Most of the local Walmarts have McDonald's built right in and they take SNAP cards...

Willzyx's picture

You missed the big one.  There really aren't unemployment cheques anymore.  Rather prepaid debt cards issued by Chase

Ganja Jane's picture

This is nonsensical; WIC checks are deposited by the WIC approved merchant in their accounts like regular checks. Way back when food stamps were paper, approved merchants could deposit them into their business accounts like regular FRNs. I helped manage a little corner store that accepted these 15 years ago. Unless the bank is selling formula, milk, peanutbutter, beans, eggs and formula, I doubt participants will be able to deposit these for cash.

Chuck Walla's picture

At least this idea aligns the school's take with the interests of the students. maybe they might even get interested in teaching something useful. maybe...

dwdollar's picture

Exactly... that's why this will never work.

OpenEyes's picture

I think the bigger reasont that this plan will never work is that it cuts out the banks!  If the school can 'sell' the 'education' directly to the student for a percentage of future earnings then the banks aren't getting their cut of the action.  The IRS won't be all that happy with it either since it'll be a no-brainer political move for a few congressturds to pass legislation to get that 5% skim to the schools as tax-deductable.   

Al Huxley's picture

You're not thinking like a (Wall Street) banker.  This is a brand new (unregulated, undefined) market.  Consider the options for bundling the income streams, package them up like mortgages, create tiers based on majors, create futures markets to bet on salaries for different disciplines, resell the packages to European institutions, create 'subprime' markets, derivatives, options markets - the opportunities for a creative and amoral 'financial engineer' are virtually limitless.

Chuck Walla's picture

@ Al Huxley Christ, you're devious!  Do you work for Goldman?  If not, they should recruit you ASAP.

aerojet's picture

Somehow, I don't think the suckers from last time are going to be in a buying mood this time around.

Bwahaha WAGFDSMB's picture

It's been tried before, the reason it didn't work is that all the liberal arts majors opted in and the engineering majors opted out.

NumberNone's picture

Agreed.  Right now the US is an importer of skills like Engineers and Pharmacists.  US colleges cannot graduate enough US citizens to meet the employer demand.  I would love to see the US and it's colleges giving away education in these fields to US citizens.  Unfortunately a free education in these skillsets will most likely be met with crickets chirping from the same students demanding free educations.  .