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February 22, 2013

The Market Can Cure Higher-Ed's Ailments

Most reasonable people realize that the tuition bubble is bound to burst. On line courses are altering the university landscape, reducing costs and the need for brick-and-mortar settings. Moreover, despite President Obama's call for additional student aid, Washington's support for higher education is bound to wane in this period of economic exigency.

Student aid is a dicey proposition organized by government loans and needs-based grants. In many instances funding decisions are arbitrary. Suppose, however, that there was a human capital fund treated exactly like the stock market where students can gain access to capital by investing in their future, i.e. making a bet on their success 

For example, the student studying acting probably has a limited financial basis for success and, as a consequence, must pay a premium to borrow from the fund. By contrast, the chemical engineering student might pay a lower interest rate for his tuition loan since the market signals his brighter financial future. 

Undergirding the market is a capital asset fund that receives monthly payments from graduates Such a market-based approach would add efficiency into a basically inefficient system. It would also remove the government from its present role as loan officer and banker for the higher education system.

President Obama often discusses ways to promote college education. He waxes lyrical about his College Scorecard to reduce the "soaring cost of higher education," but avoids proposing fundamental changes that could reduce the expense burden.

It may well be that historical forces, namely technological innovation, will inevitably bring about the bursting of the education bubble. However, there is a way to reduce the pain now and the president and his education advisers would be well advised to consider it. Markets tend to work because they are sensitive to supply and demand coefficients. Their application in higher education could reveal a great deal about funding mistakes and opportunities for efficient design in the future. 

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Published by the Manhattan Institute
The Manhattan Insitute's Center for the American University.