Sunday, August 30, 2015


Is Indentured Servitude Really a New Idea?

As a writer, I’m grateful for having readers, and I try to show my gratitude by being generally thoughtful and measured in my posts.  I’m only human, but the effort is there.

That said, every once in a while an idea comes along that’s so staggeringly bad - morally, financially, factually - that respectful treatment wouldn’t do it justice.  This is one of those times.  

Carlo Salerno argues in Forbes that we can get college costs under control through Income Share Agreements.  They’re sort of like liens on future earnings.  The idea is that a prospective student will offer shares in her future income in exchange for an upfront investment that she will use to cover the cost of college.  As Salerno frames the idea, payback would be at a fixed percentage of income for a set amount of time.  The higher the income, the greater the payback, which presumably means the more that investors would be willing to front.  If you want to major in a low-paying field, well, as Salerno puts it,

“Anyone should be able to finance a degree in liberal arts or social services or the like, but nobody should be surprised that backers will expect a higher share of their future income in return.”

Salerno notes that “critics incorrectly equate ISA’s with the 19th century idea of indentured servitude.”  Other than “incorrectly,” we agree on this point.  Salerno suggests that a better parallel is startup funding, in which investors put money in upfront in exchange for a share in future profits.

Of course, if a startup fails, you can declare it bankrupt and start another one.  The same does not apply to people.  That’s why the “indentured servitude” critique keeps sticking.

For a relatively short article, Salerno manages to include an impressive amount of wrong.  For example, he claims that “not a single institution in the past 30 plus years that (sic) has been able to establish and permanently maintain an inexpensive degree program…”  Apparently, Salerno has never heard of community colleges.  There are over 1,100 of them in the United States, so they shouldn’t be that hard to spot.  Granted, one could use the term “permanently” to weasel out of it, by saying that most community colleges were established in the 1960’s, but that’s a bit too cute.  

He also seems to believe that colleges are funded entirely by tuition.  In the public sector, that’s substantially false.  (I’ll partially concede Arizona.)  Over the last five or so years, the single largest driver of cost increases at public colleges has been state disinvestment.  Salerno suggests “funding colleges” by ISA’s, which implies embracing total disinvestment.  If we do that, the first consequence will be to accelerate tuition increases.  Salerno’s solution to rising costs is first to raise prices.  I can’t even…

Of course, Salerno elides entirely issues of equity and inclusion.  For example, nationally, white students graduate at higher rates than African-American or Latino students.  Should the market respond accordingly?  High-income students graduate at higher rates than low-income students.  Should the market respond accordingly?  Assuming that investors act to maximize returns, we should expect to see the student body get much smaller, richer, and whiter than it is now.  The market has spoken!  

At a really basic level, Salerno errs in treating eleemosynary institutions as if they were consumer retail.  They are not.  They are self-conscious efforts to achieve a broad social good.  By social good, I mean something that goes beyond the payoff to the student.  Community colleges are called that because they exist to serve the community.  That means helping high school dropouts with adult literacy classes.  (I don’t imagine investors lining up for that one.)  It means teaching ESL to people whose first languages aren’t English.  (The “indentured servitude” parallel would get really disturbing there, assuming any investors at all.)  It means offering second chances to students any rational investor would have long since abandoned.  

Those aren’t design flaws.  They’re features.  

Besides, efforts to time the market are famously futile.  A student who entered college in 2006 and graduated in 2010 saw the world change in the interim.  Yes, some bets are higher-percentage than others, but anyone who thinks equating fields with jobs is easy is invited to explain the job market for new lawyers.  

Finally, none of Salerno’s mechanisms address underlying costs.  If you’re serious about reducing the tuition spiral, you don’t redirect institutional aid to students.  When you do that, the only way for colleges to make up the loss is to charge more.  If you’re serious, you increase operating aid on a predictable long-term basis; you move away from the credit hour; you restructure financial aid to allow people to use the summer as a real semester, thereby completing more quickly; and you do everything possible to increase the number of middle-class jobs open to new graduates.  You don’t cherry-pick the wealthiest and squeeze the rest even harder.  

ISA’s, as Salerno presents them, are a terrible idea.  They’re plutocracy in the guise of efficiency, founded on a deep foundation of either ignorance or profound indifference to the community.  No.  Just, no.

Tomorrow I’ll try to be my usual, more measured self.

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