I’m hoping to soon get started on a paper about reforming Australia’s shambolic student loans system, so I was interested in a Marginal Revolution link to Lumni human capital financing.
Lumni invests in students in exchange for a share of their future earnings. Joe Clark wrote a Policy article on this a few years ago. From a student’s perspective, it has these differences from our HELP scheme:
1. With Lumni, the graduate provides an agreed % of his or her income for a fixed period of time rather than a fixed % of his or her income until the debt is paid off or the graduate dies. Successful graduates could end up paying much more under Lumni, while unsuccessful students will have their debts written off more quickly.
2. Lumni will only invest when it believes a return is likely – so presumably it will not invest in risky students (eg older students, those with weak prior results) or low-return qualifications (eg Arts). HELP will lend to anyone regardless of risk. As Joe points out in his article, one advantage of seeking a return on investment is that there will be more research into the prospects of different degrees, institutions, and types of student. This could help guide students even if they don’t take out a loan.
3. Because HELP spends taxpayers’ money, nobody cares much what happens to it or the students they have lent to. Lumni helps students get jobs, to their mutual benefit.
Because HELP effectively offers subsidies to students, I think Lumni-like entities would struggle here. But from a small government and market-oriented perspective, it has clear advantages. It doesn’t mean that some disciplines or student types couldn’t receive special treatment by the state. But most students attend university for primarily commercial reasons, and Lumni-type arrangements would fix the education capital market problem without state subsidy or all the red tape that goes with it.
Andrew Norton 
Yeah, the current set-up is pretty weak. But not sure on this one.
When it comes to students obtaining funding, there are always alternatives – e.g. borrowing from a bank. Under the Lumni system, succesful students pay more – so what does that do to incentives? Hmmmmm.
Knowing in advance that I am likely to be succesful, I would want the flat rate. If you can’t get a flat rate from Lumni, then I would go to another lending institution.
Alternatively, given the choice, hopeless students are likely to opt for the % system. Thus, there is potential for a mega moral hazard!
Plus, on point 2, if you want returns on investment, you’re talking market rates. That being the case, why borrow from Lumini, when you can borrow from the bank!
On point 3, I can’t say I’ve seen too many loan providers masquarading as HR recruiters. But I guess there’s always a first for everything.
My solution, consolidate the unis, privatise them, jack up the fees, drastically lower income tax, and keep the government right out of it. Maybe a little drastic, but at least its not short on vision 😛
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Something like this combined with deregulation of fees and places would be a great outcome. There could be heaps more people doing vocational courses like dentistry and medicine or even physio or nursing. But I’m not sure how it could work under the Melbourne model. Also, there is unfortunately no way for a woman to credibly signal to an investor that she will postpone having children for a number of years. So there would have to be a way to discriminate against female students where large sums were involved.
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I would have thought rather than simply not investing in the high risk students, they would simply factor in the risk in the form of a higher percentage requirement.
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The higher the percentage, the greater the disincentive to work and the greater the risk of adverse selection (picking students who have no intention of earning money after graduation). So investors may choose to limit their dealings to students doing high-paying vocational courses.
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Ah. Thanks!
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I wonder if the smart Commerce/Law student could hack their way out of this… create a company with their domestic partner, consult through that company, take nil out (the partner does, supporting the lifestyle of the person who got the loan), so, like not a few “bottom of the harbour-ish” schemes, end up a net liability for Lumni while living the high life. I wonder if Lumni contracts have got such shenanigans pinned down.
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Back to the future we go! In mid-19th century Victoria plenty of the people who did the actual work that made the squatters into respectable wealthy landholders came over as indentured servants – costs of passage paid in exchange for x number of years of their labour.
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I have not read all that many issues of Policy, but I found that one by Joe Clark a few years ago, one of the most thought provoking ideas I have ever read.
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http://www.humancapitalproject.wordpress.com
NGO personal equity scheme in Cambodia.
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The first students from John’s project will be graduating soon. All the payments go back into financing more students so the scheme should be self-sustaining after a few years if all goes well.
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