2nd Year Reflections: Financial Innovations != Student Financing

In our economy there’s been so many financial innovations. Some for the better, some for the worse. But one area where I feel there could be more creative solutions is financing education.

On this topic, taking a SIP (Sloan Innovation Period) class from one of my favorite professors (Professor Paul Asquith), he gave us a quick introduction on corporate structured securities and went over dozens and dozens of unique examples. In the aftermath, it made me think about my MBA and how I’m currently financing it. Right now I’m pretty much taking a loan from the US Government and other private banks, getting the capital upfront, then paying them back with interest after I graduate. Essentially it’s similar to me issuing a bond, and then paying it back over a number of years. Shouldn’t there more options to finance education?

BOND STRUCTURE

Another alternative is to change the way the current bond-like structure is done. Instead of banks issuing loans based on co-signer, credit score, etc, then selling their student loans so that other banks can group them together to sell securities based on that, why not make more specific securities. An an example, group together MBA student loans, where one might say has a high guarantee of re-payment. Or, you could group together different majors, different schools, and try to differentiate based on that.

Recently Business Week had an article that combined a variety of data to examine the ROI of a degree, seperated by undergraduate university. What if, based on that (and other data), a student would be able to get a better loans rates by proving that they have a higher chance repayment rate. Further, this would an excellent way for Alumni to stay connected. More than just donators, they could be INVESTORs of their alma mater.

This particular idea has recently been explored by INSEAD. Individual investors would be financing the educations of a specific graduating class of INSEAD MBAs. This topic has been explored by my classmates over at “The MBA Show.”

This to me is a very interesting idea. I would think alumni in general would be very supportive of following the students were come after them, and makes the idea of financing education much more community based.

STOCK STRUCTURE

Why not try to mimic a stock structure instead of a bond structure? Why not do something interesting like selling a percentage of your future earnings for a set number of years?

One might argue that this incentives the student to not make money, instead doing Peace Corp or Teach for America or going off and being a teacher. Then EVEN more I think this financing structure should be done. Instead of banks, the government could do the financing to encourage this behavior.

Further, the structure (payout, percentages, years, etc…) could be different depending on program; MBA, Architecture, Engineering, Graduate or Undergraduate.

As an undergraduate, going into college at 18 it is a very unlikely that the student knows that they’re doing in the next 4 years. This might be an excellent opportunity to take a risk for both parties.

I know for myself, what % and years I would consider reasonable at 18 going into college would be very different than the what I felt at the end of college, or even at the beginning of business school.

Thinking about all this…it brings me back and helps me better answer a more fundamental question: What is the value of education?

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