Thursday, October 20, 2011

Education for Education

Education loans are based on the same model as other loans, the difference being that interest rates are less compared to other kind of loans.  The model makes sense since banks are in it for money. But what if this was done by some non profit organization whose only function is to make it easy for people to get educated.

Lets say it cost C1 at time T1 to get education E. Lets say at some time T2 in the future the cost of same education is now C2.  Lets say "payback" amount for an education loan is simply a function of current cost of that education. You can "payback" at any point in time, after 2 years or 10 years or 20 years or do partial payments. Basically what you get at start is "cost of education" and what you payback is also "cost of education".  Essentially I am decoupling "cost of money" which is interest that banks charge over time from "cost of education".

Under normal circumstances, this would have ensured that non profit organization which has funds to support education of N persons, will continue to have funds to support N persons at all times in the future.  When I looked up wikipedia for cost of education is US, it looks like this would have been a very bad deal given that cost of education in US has increased 2.5 times more than inflation (which is a good indicator of interest rate scheme).  I don't know what is going on here.

The economic feedback loop is pretty big here.
 => High cost of education
 => Student debt
          => Unable to pay
                => Economic instability or political unrest
                     => Depression ?
 => Choose not to go for higher education
          => Less qualified people for the job
              => More salaries for qualified people
                     => Now debt for higher education is justified
 => Universities make loss, less students enrole
        => Universities decrease prices
            => Stability - cost of education is justified

It takes years before we know the mistakes and rectify them.  I keep coming back to the same point, money is a bad abstraction. We need a better model for making people help other people now, in belief that they will be helped when needed in future.


  1. If we look at Government as a non-profit organization, one idea could be to subsidize the loan with the assumption that the student would repay subsequently in the future in X years. If he cannot repay, Govt could provide multiple guided/selected options for a fixed period:

    - Serve the nation in some or the other form
    - Do social service
    - Teach in villages
    - Become a doctor in a village hospital. Or in general, map the profession and channel the talent into right/needy areas of the country.

    Win Win for everyone. In the extreme scenario of everyone repaying the money, govt will continue to be able to fund education of future students. The ramifications of the other extreme scenario (lot of people deciding to serve the nation) are interesting as well.

  2. Completely agree. I guess it boils down to ensuring work for everyone after ensuring education for everyone.