Funding education

Present scenario – Student takes a study loan at say 7% from a bank to study in a top MBA college. College claims that average package after a degree is say 16 lpa. And course fee is 21 lakhs per year.

Student takes the plunge hoping of a bright future, i.e earning at least 16 lps so can repay loan in say 5 years.  Now some mathematics:

Student pays bank in 5 years - 30 lakhs (approx) [assuming that he pays in total at the end, in reality the repaid amount will be lower than this]. Problem occurs when market conditions are adverse and the student is not able to get a job that pays so much – he/she is stuck really badly. College has got its fees but student has not got a job. Indirectly that affects the college in a way that less people think of enrolling next year plus a media and public resentment against justification of such high course fees. College also feels bad (at least some people in the system) that they took so much fees but could not help the student get the foothold in society that he/she aspired, based on the claims made. Some moral guilt gets in.

One way to do away with this guilt as well as create goodwill in market about the college PLUS bring about cohesion among college administration and students in terms of job hunting PLUS enable the college to earn more and engage better with alumni is to have a deferred fees mechanism.

In this scheme – a student pays 0 fees to study but signs an agreement that he/she has to pay 50% is/her post tax salary to college for next 4 years.

How it helps college?

If we assume the average claimed package of the college, say 16 lps, then post tax say the person earns 12 lakhs he pays 6 lakhs in 1^st year. If we assume this person has meager 10% hike every year then:

Year	Salary	Contribution (approx)
1st	16 lakhs	6 lakhs
2nd	17.6 lakhs	7 lakhs
3rd	19.36 lakhs	8 lakhs
4rth	21.2 lakhs	8.5 lakhs

Total contribution would be 29.5 lakhs. Now assuming the college had collected 21 lakhs upfront and put 20 lakhs out of that in a 9% return yielding fund, return after 5 years (1 year study + these 4 years) would have been 31 lakhs (approx). So return is not much less in terms of money but the comfort it gives to students and the image this projects of the college would justify this approach. You can imagine how much more students would aspire to study in this college and how much more respect the college would earn across the academic fraternity. It would differentiate this college from rest of all other colleges who just claims good job/salary figures to raise fees and make more money, who seems more like a business than an education institution.

Plus the alumni engagement it would create would be wow. There can be an option for a lifetime contribution of say 1000/ year from the student. No one would mind paying this to a college which has so much confidence in its curriculum, its selection process and its knowledge base that it is allowing selected bright students to study for free.

This will also remove the bias that some faculty have that students earn so much while they get less – since now they know that more the student earns more will be the return to the college.

Very broadly speaking it is like trading – where instead of investing in stocks, you are investing in talent and have the confidence on your capability that return will be more.

Why would the student opt for this?

You might think the student would pay less to bank if he/she takes a loan and so why opt for this and pay more to college. But my theory is they would do it, because this approach takes care of another risk which the bank does not AND that is the risk that the college absorbs. The risk is of adverse market conditions such that there might not be any jobs or very low paying jobs after passing out. Worst case scenario is a student earns say 5 lakhs for the next 4 years and so pays 2x4 = 8 laksh to college, so college loses 13 lakhs. But I think it is worth the risk.

 A loan is a compulsion but a repayment to alma mater is a super good feeling.

Ofcourse – there might be people who might think of misusing this option, so this offer should not be rolled out indiscriminately but rather very selectively, after some interview.

To ease the impact of contribution from student if college can open a trust or something which enables tax exemption on the paid amount then still better.

Most data presented above are approximations, intent was to pass the point rather than show exact numbers. If you think this is something that would be good to roll out then you can get the exact calculations done OR I would love to do that if asked. 

Government and financial institutions need to change

Suppose you are given 1kg gold and 100 people of different professions and left in an island which does not have anyone living there. The intent behind such a situation is to create a scenario where we can replicate what it is like to create and run a financial system of a country.

There are doctors, engineers, barbers, cooks etc etc, all professionals who would be required to live and sustain. In order to facilitate trade you print notes equivalent to the amount of gold with you. Reason for that is in case you need anything from outside world you need to pay it using gold. Now comes the tricky part. To start commerce you distribute money with all equally (to be fair and just you give equal to all) and ask them to use it for trade. Overtime service charges by people will change, some will charge more and some less. For the services that are costly that person would finally over time accumulate more money than others. So since the overall money in circulation is fixed the final outcome of such a set up is that someone will become rich and someone poor. And you charge a percentage of every transaction, i.e tax. So another eventuality is that money left for circulation will reduce over time and all will come back to you.

If we generalize it at a country level (which would be simplifying it too much but still I am putting it this way since writing so much is boring) then the way the system is designed there will be economic disparity in the country and government will get back all the money. What does the government do with that money – it just consumes it by paying a bunch of people it employs and spends some on development, which in turn would get it more. In real life we see countries getting poorer because what they need for growth, incase that is not available within its own country, it needs to buy so gold goes out. Now when gold goes out do countries pull back equivalent amount of notes from circulation? Answer is NO – hence it loses its intrinsic value – leading to inflation. That is a different story – what I want to focus on is the first part where it is clear that the way society and economy is designed it is made to create economic disparity. So why make do so many governments make so much fuss about removing poverty? And so many economists come up with research papers saying how poverty can be tackled when it is structured to be that way.

What is needed is a different model to achieve balance of wealth – may be totally different way of running economies. Is my analysis right?