American Dreams (12 page)

There is a better way for Americans struggling to pay off student debt. Government can and should make income-based repayment the default repayment method for anyone who takes out a student loan. When students sign the promissory note for a loan, they would automatically be enrolled in a repayment schedule based on income after graduation. If they're lucky and their income is high, they can make higher payments on a shorter schedule. If they find themselves in a lower-earning job—either by choice to give something back to the community or because entry level pays entry level wages—they will automatically make lower payments. Either way, it's a good deal for students and a good deal for taxpayers. Loan defaults would drop substantially, preserving students' credit and saving the taxpayers money.

Income-based repayment is an option I wish I had had when I graduated. My first job as a young attorney paid over $50,000 a year—more than my parents had ever made. I thought I was rich. But even though I was living with my parents, I was paying them rent. I was also trying to save for my wedding and to buy a house. When the $1,500 student loan payments starting rolling in, I realized I couldn't pay them. And I was one of the lucky ones—
I had a job
.

So I did deferment. And forbearance. I paid only interest for a while. But the loans quickly became my single largest expense. I remember looking at the coupon book for one of them and realizing that at the pace I was paying these things, I wouldn't pay them off until I was over fifty. And sure enough, when I raised my right hand and was sworn in as a United States Senator in January 2011, I still owed over $100,000. It wasn't until the publication of my first book,
An American Son
, in 2012, that I was able to repay my loans.

That makes me a cautionary tale for young Americans like Evan. Evan is one of the lucky ones too—he landed his dream job working for the Miami Heat, but for now, at least, the job is entry level, part-time and doesn't pay that much. He's moved out of his parents' house and rents a place of his own, a single room in Miami, but he tries to be careful with his expenses—he always puts in for additional hours with the Heat and works a second job in retail. Still, Evan can't think about getting married or owning a home with his student debt hanging over his head. He works with people in their forties who are still paying off their undergraduate loans. Evan doesn't want that to be him in twenty years—he doesn't want to be
me
in twenty years.

“I don't want to have a family and be making payments on my kids' school while I'm still making payments on my school,” he says. Still, he's afraid he might have to.

Right now, students like Evan are in a double bind: They are forced to assume all the risk of investing in higher education without having access to any data on the returns. The Student Right to Know Before You Go Act would help provide the data, and income-based repayment would help ease the process of repayment. Yet the current system of student loans still leaves Evan in debt just as he seeks to start his professional and personal life.

What if there were a way to give students the option of paying for their education without acquiring any student debt at all? What if investors assumed the risk that students and their families now bear alone in student loans? What if there were a way to finance your daughter's or son's higher education the way we finance start-up companies—by having others make the investment in their success?

There is a way and here is how it works. Let's say you are a student who needs $10,000 to pay for your last year of school. Instead of going into debt for $10,000, you could apply for a “Student Investment Plan” from a private investment group. These investment groups would pay your $10,000 tuition in return for a predetermined percentage of your income for a set period of time after graduation—maybe 4 percent of your income a year for ten years. At the end of that period, if the amount paid is greater than the investment, the investors make a profit. If it's less, they lose money. Either way, they assume the risk of paying for your education. Unlike with loans, you would be under no legal obligation to pay back that entire $10,000. Your only obligation would be to pay that 4 percent of your income per year for ten years, regardless of whether that ends up amounting to more or less than $10,000.

The idea of making investments in human capital traces back to the great economist Milton Friedman. But it was Ziggy Stardust himself, David Bowie, who provided the inspiration for such capital investing in college educations. In the late 1990s, Bowie sold shares of his pre-1990 albums' future sales revenues in order to raise cash. In return, true believers in the timelessness of “Fame” and “Space Oddity” received a percentage of his record sales and song royalties for ten years.

Bowie Bonds inspired some financial analysts who had watched promising classmates drop out of school because they couldn't afford to continue. What if students were, in effect, allowed to sell bonds in their future success? The concept has been tried in Europe and Latin America, where it has been a godsend to low-income students in particular. The practice—in which students sign contracts obligating them to the terms of the investment—hasn't been used much in the United States because there hasn't been legal clarity over the administration of the contracts. Questions of who would enforce the contracts, and state laws that prohibit the assignment of future income, have held back potential investors. But I believe it's time to take a more creative and innovative approach to paying for higher education.

The Investing in Student Success Act, which I introduced last year, paves the way for a new and less risky way for families to pay for college. The legislation creates investment savings accounts to allow investment groups, under carefully circumscribed rules to protect students, to invest in students' tuition in exchange for a piece of their postgraduation income. These groups would look at factors such as a student's major, the institution he or she attends and his or her academic record, and then assess the student's likelihood of getting a good job and paying them back.

The key to the success of this kind of investment is to create a large enough pool of students to spread the risk around. Some students will be good investments, others less so. For large employers, these education investments would provide a hedge against rising costs. Boeing, for example, could invest in engineering students. If, in the future, salaries for aeronautical and electrical engineers grew, Boeing would experience a higher return on its investment. Others will be attracted to make these investments for philanthropic reasons. But in the end it is the less advantaged students—the ones for whom traditional student loans would be the biggest burden—who would benefit the most.

Some critics have compared these kinds of contracts to indentured servitude, in which the purchaser literally owns the person and his labor in exchange for a payment or service. But that comparison is silly and inaccurate. My proposed law mandates that investors fully and clearly disclose the terms of the contract to students. It stipulates that the first $10,000 of the student's earnings each year after graduation must be exempt from the income total used to calculate repayment. That is, the first $10,000 cannot be included in the income from which a percentage is paid. In addition, the contract may not exceed 15 percent of the student's income in any given year, and the repayment period may not be longer than thirty years.

Student investment contracts won't replace student loans, nor should they. But they represent the kind of innovation we need to make higher education work for American families again. In addition to taking much of the risk out of paying for college, student investment contracts will give institutions new incentives to prepare students for the workplace. Investments in students' success would put the performance of higher education to the ultimate test: that of the marketplace.

Word will quickly get around in the investment community about which colleges and universities produce high-wage earners, giving all schools a new impetus to turn out students ready to succeed in the new economy.

Education's power to make the American Dream possible is something that is very close to me. First, admittedly, it was an abstraction my parents drilled into me as a child. Later, it became a reality that I saw change my sister's life. You see, I had the good fortune of being what we think of as a traditional student, coming out of high school and going immediately into a four-year degree program. My sister didn't have that luxury.

Barbara is my older sister. She never had the same opportunities I had. She married young and didn't go to college. Before my senior year in high school, she wound up living in our parents' home with an infant son and another on the way. All the odds were stacked against Barbara. She could have given up, put herself and her family in the hands of the social welfare system and passively accepted a life of dependence. But she didn't. In her early thirties she found herself working at an insurance company processing paperwork. She knew that if she didn't get a degree, she would never make a better life for her kids. So while my parents helped watch my nephews, Barbara went to Florida International University and earned an education degree. She went to work as a special education teacher. Then, while working as a teacher, she graduated with a master's degree in education. Today, she is the vice principal of an elementary school in Miami.

Barbara is a good example of what a twenty-first-century student looks like—not just the eighteen-year-old high school graduate but the older student. The struggling mom who wants to increase her earning potential but can't just drop everything and go back to school. The returning veteran. The worker who has lost a job that is never coming back and needs to be retrained. The high school student who wants to fix airplane engines but loses interest in schoolwork that seems geared toward the college-bound. It is a tragedy for these students of today that we still have an education system that caters to the students of yesterday.

There are millions of Americans who don't have the money, time or inclination to spend four to six years on a campus. At the same time, companies complain of a shortage of skilled workers. So smart, forward-looking companies are beginning to partner with local governments to close this gap. In Cleveland, General Electric worked with the city to create the MC2 STEM High School, which brings students to GE's manufacturing plant their sophomore year to get practical experience and mentoring from GE employees. MC2 STEM's graduation rate is 95 percent, compared with just 60 percent in the Cleveland public schools.
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These efforts deserve more of our support. Our education system—and we as a society—need to stop looking down our nose at people who don't sit behind a desk or a computer for a living. These are honest and, in many cases, well-paying jobs—jobs that are going unfilled for a lack of workers with the right skills. America has a shortage of welders, for instance, to fill new jobs in the oil and gas industry. Trade schools like the Hobart Institute of Welding Technology in Troy, Ohio, can't graduate skilled welders fast enough. Caterpillar is working with high schools and community colleges near its plants in North Carolina and Georgia to attract and train workers.
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There is no one-size-fits-all solution, but it is telling that so many of the solutions being offered are coming from businesses and the local governments that are eager to have them. In South Carolina, BMW has created an apprenticeship program with community colleges near its Spartanburg plant. The first class of BMW scholars graduated in 2012 with full-time jobs. Up in Brooklyn, IBM has partnered with New York City to create a hybrid technical school where students earn both high school and associate degrees when they graduate.

Like increasing numbers of students and parents, more and more businesses are surveying the value provided by American higher education and finding it wanting. A remarkable Gallup survey found that while a whopping 96 percent of college and university officials were confident that their institution was preparing students for the modern workforce, just 11 percent of business leaders strongly agreed.
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The disconnect has gotten so bad that Google—the dream employer for the newly graduated—has begun to de-emphasize college credentials in hiring. And Peter Thiel, the cofounder of PayPal, is paying high school graduates
not
to go to college. What's wrong with this picture? And how do we fix it?