Sunday, April 29, 2012

Higher education as investment opportunity

It strikes me that most people in favour of tuition hikes view higher education as a net loss paid by their taxes, rather than as an investment that will bring high dividends in the future. It is my wish that more people approached higher education funding like venture capitalists approach startups -- as an investment rather than as a cost. Let me explain what I mean.

Statistically, 9 8 out of 10 startups will fail, costing venture capitalists millions. However, the 2 that succeed will more than cover the losses on the other 8, with lots of extra profit on top, which is why the VCs continue to do it.

Opponents to free higher education tend to point out how many students have trouble finding jobs after they graduate, especially those who chose to major in humanities. However, if we look at it from the same perspective as venture capitalists, it doesn't matter that many students who receive higher education end up working minimal-wage jobs. We as a society reap our monetary and cultural benefits from those few who do succeed.

Averages can be tricky, but we shouldn't ignore them. On average, people with higher education tend to earn more money. People who earn more money pay more in taxes. A province with more highly educated people will be on average more prosperous than a province with fewer highly educated people. This goes beyond just monetary prosperity -- a lot has to be said about culture and just plain joie-de-vivre. Money doesn't tend to stay for very long in dull, desolate places.

But this isn't to say that we shouldn't be smart about investing our money. It doesn't make sense to invest tens of thousands into someone's doctorate degree just to see them move to some other province or country, leaving us to foot the bill. Similarly, it doesn't make sense for all universities to charge the same tuition fees. Some are world-renowned institutions, while others are humble community colleges. One size doesn't fit all.

By changing how we allocate funds, we can both allow universities to charge tuition based on their needs, and hedge our bets to ensure that the money we spend on higher education brings dividends back into our pockets, instead of the pockets of some other provinces or countries.

So, how do we do it?

The government will provide students with a no-interest, inflation-indexed loan to complete their studies. Upon graduation, the government will establish a simple repayment scheme:
  1. If the person resides in the province but has no income, the government simply re-indexes the loan to keep up with inflation.
  2. If the person resides in the province and has income, the government repays a part of their loan. The sum repaid reflects the amount paid in provincial taxes.
  3. If the person leaves the province, the loan is sold to a commercial bank of their choice. The taxpayers are fully reimbursed and repaying the loan becomes that individual's responsibility.
Simple enough?

Let's say Pierre goes to McGill to become a family doctor:
  • McGill charges him $10,000 a year for 5 years of studies, resulting in a $50,000 loan with the government. 
  • After graduating, Pierre has trouble finding work for a couple of years, so his loan remains with the government and grows by 1-2% a year, reflecting inflation. 
  • In his third year, Pierre finds a job and earns $60,000 in income, paying $10,000 in provincial taxes. That year, the government pays a $2,000 instalment towards the loan. 
  • Five years later, Pierre earns $150,000 a year, paying $30,000 in provincial taxes and the government pays a $6,000 instalment towards the loan. 
  • A year later, Pierre finds a job in the US and moves to work there. The remainder of his loan is sold to a commercial bank, which pays off the loan to the taxpayers.

As you see, this is a net win to the government (and us, as taxpayers), since not only did we not lose any money on Pierre's education, but earned many times as much in taxes, not to mention benefited greatly from his skills as a practising doctor.

Let's take another example:
  • Pauline goes to UQAM to become a teacher. UQAM charges her $8,000 a year for 3 years. Her loan with the government is $24,000. 
  • Upon graduation, she finds a job right away, but only earns $35,000 a year for the first few years, paying $4,000 in provincial taxes. The government pays the minimal instalment of $1,000 towards her loan. 
  • 10 years later, Pauline earns $60,000 a year and pays $10,000 in taxes. Her loan is reimbursed at $2,000 annually. 
  • Pauline never leaves Quebec and her loan is fully paid off in 17 years, except she'd completely forgotten that she had a loan at all, as she's never had to worry about payments. 
  • As far as Pauline is concerned, she never paid a dime for going to school (which, of course, she did, via her taxes).

And, let's take a third example:
  • Michael goes to Duke university in North Carolina and finishes his physics degree in 4 years, taking out a loan of $150,000 to pay for his studies. 
  • He finds out about a "Come work for us, we'll help pay your student loans" program in Quebec and finds a job with Hydro for $90,000 a year, paying $20,000 in provincial taxes. Quebec government gives him a $4,000 annual tax credit towards his student loan payments.

Lastly, to prevent anyone from "perpetually staying in school," we can choose an arbitrary ceiling, such as $80,000, after which no more loans will be issued by the government.

This scheme is simple, transparent, and assures that any amount we spend on higher education is a true investment into the province that stays in the province, all without weighing down our youth with heavy loans at precisely the age when what they need most is a boost.


Anonymous said...

A counterpoint to this argument, from Mike Rowe, host of the show Dirty Jobs. It's ten minutes, and worth your time.

A key quote: "we talk about creating millions of shovel-ready jobs for a society that doesn't really encourage people to pick up a shovel... reshaping our expectations of a good job into something that no longer looks like work."

Unknown said...

I fully agree with that statement -- we need to show people the other side of well-paid jobs. Alcoholism, drugs, sleep disorders, disfunctional families, stress -- to name only a few things that plague doctors, lawyers and CEOs. We need to do a better job promoting "simpler jobs" and "simpler living," and also make it so someone choosing to become a farmer or a skilled tradesman doesn't feel bad for making that choice, nor views it as a financial sacrifice.

That said, it is already free for someone to become a skilled tradesman in Quebec. We have a system of CEGEPs ( in Quebec that provide free vocational and general education training that is roughly the equivalent of the last year of high-school and first 2 years of college. While I tried to make my write-up less quebec-specific, I couldn't get away from that entirely. :)

Unknown said...
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