Student Loan Derivatives

What this nation needs is financial innovation in the realm of student loans. Milton Friedman described a simple contract whereby students would receive tuition aid from an investment fund in exchange for a portion of their salary over the immediately following 10 years. In a sense, a fund would be taking a risk in investing in people the same way it does when looking for an entrepreneur to invest in.

If implemented, such a system of human capital contracts will revolutionize education and provide information to students. Percentage of income collected could be based upon a combination of degree attained, major chosen, and expected performance in the job market. For instance, a driven student who is deciding between going into gender studies or engineering will be instantly hit with the expected earnings of each degree simply by looking at the percentage of income that they would have to give up in each case. People who are not as driven will find that they would be required to pay a higher percentage of their income and may consider doing something more socially productive such as a trade school.

Such a system would be a far better alternative to the status quo. As it currently stands, a student loan is federally guaranteed and non-dischargable in the case of bankruptcy. By removing federal subsidies from student loans, students will become more productive, more likely to graduate promptly and more knowledgeable about the costs and benefits of each major. It would also save students from the crushing debt that they face when they graduate.



propitiate- to conciliate; to appease

pulchritudinous- beautiful