A private contract to regenerate corrupted universities
How the market can solve the financing of higher education when the 92% of state resources that fund it disappear, still resolving the social security issue.
Abstract: The following text is a draft (corrections and suggestions are welcome), an outline of ideas and references on how income share agreements - ISA can be a solution (with or without government support) for the problem of student funding, the collapse of social security and the regeneration of universities corrupted into dens of militancy by excess of influence and public money. The contract consists of an investor (educational institution, relative or party with greater access, control and information about the student) paying for the debtor's education in exchange for a percentage of his/her income for a specified period - with the possibility of losing wealth or multiplying investment, improving control mechanisms ( convenants) and selection. The execution of this contract can be made possible by the government (legal framework giving legal certainty to its execution) or by means of private judgment and execution with escrow (fiduciary guarantor), arbitrator and guarantor in multsig. The data used is mostly North American, but the same problems and solutions are observed all over the world, to different degrees.
1. Premises/Introduction:
Freedom is the greatest resource that exists and all corruption comes from the dissociation of control and property, this has already been mentioned and referenced in other texts and will be demonstrated below.
People respond to motivations, most people tend to follow dominant behavior - the one that is most worthwhile. If the majority does not follow a higher cost/benefit behavior, it will cease to be the majority due to natural selection: if a bastard has no right to anything, there is no point in giving a married man a blow to the stomach; if there is no imposition of paternity by DNA, there is no motivation for sperm theft. If you don't agree or understand this, don't continue, you'll just get bored.
In this way, as is observed in reality and is widely demonstrated in Institutional Economics, natural resources do not guarantee development to countries or regions - as explained in the "Dutch disease"1. Development is correlated to motivations: where it pays to be honest, the the majority tend to behave cooperatively, creating and accumulating wealth; where it pays to be opportunistic, the majority tends to behave as an opportunist and whoever accumulates or produces something that depends on the custody or protection of others ends up losing.
2. Context/Problems:
In the USA alone, student debt has already exceeded 1.7 trillion dollars2 (more than Brazil's GDP in 2021). The left itself recognizes that the main campaign promise that elected Biden was to cancel the student debts3 of 13% of the population (43 million debtors) - ignoring the wide distribution of tens of millions of unsolicited mail-in envelopes, exploding the purchase of votes4. Bolsonaro did what Biden promised: he forgave up to 93% of the debt of the FIES deadbeats, once again, stimulating opportunism5 - although in Brazil there were less than 1 million beneficiaries and with values orders of magnitude smaller than the debts of the Americans.
In addition to negative interest rates inflating the value of assets and administrative capture (regulations to enrich those with political access benefiting large corporations), student debt is considered one of the great destructive factors of the American middle class6, both for preventing inheritance (since most of the creditors are unable to pay the debt) and because it makes entry and permanence in universities more expensive7 (since the wide supply of credit caused an explosion in the cost of education in the country, almost tripling since 1971, even corrected for inflation8).
As those who finance the courses have guaranteed payment, they have no motivation to control the quality of the students or the course. As universities receive their payments regardless of the result, they also do not suffer any pressure for quality control and much less cost9.
The students and their families, even worse, are the least informed about the relationship and the ones who have the greatest cost in assuming the risk of the undertaking (since they have less information and less possibility of diversification), usually emotionally deciding whether to study (and where) based on on the (at least) biased assessments of the university and funder that approved them. That is why universities were degenerated into dens of political militancy, since most of the wealth10 obtained by them depends today on educationalist political militancy11 and not on the supposed "educational services" and much less on their capacity to increase productivity or capacity to generate income. Wealth of its students If the government pays more than 90% of tuition, it is the main customer to be satisfied.
In this way, useless courses (uselees majors) become viable that do not qualify for any productive activity and that their graduates, as a rule, will go into even more debt to do masters and doctorates - or will work in activities not related to graduation, usually with a loss of comparative value to if they had never set foot in college - Cuba12 is the extreme case of graduates, masters and doctors who are drivers, prostitutes, cooks and waiters, but even in the USA it is not uncommon for graduates to baristas, Starbucks or McDonalds clerks - reaching 48% of Uber13 drivers in the US.
For most students the current system reduces their wealth and income. Certain (and rare) degrees have a present value of more than 1 million US$14. However, the average ROI - average return on investment (marginal income gain due to the acquisition of the degree brought to present value - NPV) among 30,000 courses in the US is 129,000US$. Thus, in the vast majority of cases, the student does not have an average gain in relation to the opportunity cost since: 1) the average income in the USA is more than 30,000 US$ per year (and those who attend college delay years in starting their career losing 4 years of work, usually at peak productivity and health); 2) there is a risk of becoming one of the 40% of dropouts (who do not graduate without obtaining any investment benefit); and, 3) there is also opportunity cost in gaining experience, capitalization, real education in working full time instead of dedicating years to formal education and restricted opportunities after graduation, such as military service. This with current data, with negative real interest and highly subsidized rates, with normalization of interest tends to get worse.
Below is a description - in its main benefits and motivations - of a contract that can combine the interests of universities, student debtors and investors, resolving the three issues: 1) how to guarantee pension systems (given that pay-as-you-go systems collapse with insufficient fertility and capitalization collapse with systematic negative interest); 2) how to make available private resources in abundance and market correction mechanisms for student financing (of courses and students who really have the potential to have a return on investment); and, 3) how to remove distortions derived from undue regulations, realigning motivations mitigating corruption and opportunism.
3. Hypothesis/Solution:
As is the rule among regulatory problems, the solution begins with the removal of distortions created by state actions15 and ends with the alignment of interests with cooperative motivations.
In this case, there is a contract that, if its performance is guaranteed, can offer a private solution for student financing, also resolving the infeasibility of social security: these are voluntary income share agreements16. In Brazil, for vocational courses17, this contract already exists in a modality in which the educational institution finances the course and the student pays proportionally to his income and if he does not have a relevant income for 60 months, he does not pay anything.
The investor assumes risk and aligns his motivations: in making the correct selection of students and courses with return potential and in maximizing the debtor's income (which is a "partner"). The debtor is also duly motivated in choosing viable courses and of demonstrate and develop the necessary skills to pass and take advantage of such courses.Investors commit to financing the costs and students commit to paying a percentage of their eventual income for years - not having any debt after the contracted period.
Students are usually the least qualified to assess their ability to generate value by enrolling in a course or program - either because of their age, inexperience in the market or inability to carry out a comparative self-assessment. Investors with lower allocation risk (with more information, possibility of diversification and control) who would have, with lower cost and risk, to control attributes and compatibility between student and course - enriching if they were right and impoverishing if they were wrong, being corrected the criteria adopted by market mechanisms.
Take, for example, an uncle who was willing to finance a nephew's medical school for 10% of his eventual income for 30 years after the completion of their residencies:
Would a veteran uncle in the area be more or less able to assess his nephew's income potential in relation to governments and banks? if the uncle believed that the nephew lacks the mental skills and attributes to become a productive professional, would he have motivations to take out this contract? If the uncle financed a student every 6 years consolidating a marginal income of 10% pa for 30 years and it cost less than 20% of his own income, if he selected and controlled (including through covenants18) the debtors well, the income would not support indefinitely new financing after the second borrower starts paying - and a sustainable income after the 3rd?
Trade is exchange that creates value, voluntary private contracts increase the wealth of both parties. If the loan has no prospect of producing an increase in wealth for the financier, would he accept this contract? If the loan is not expected to produce more than a 10% increase in the student's future income, would he accept this contract?
Once the contract is successfully fulfilled: the student has doubled or tripled his future income and supplemented the investor's income for 30 years (paying 10% of the debtor's income in the period) that financed 5 or 6 years of his studies, there was motivation of one party to be opportunistic with the other? Which? Wouldn't this be mitigated if the debtor's eventual estate/inheritance were collateral lost in the event of fraud or default?
If the answers to the previous questions are consistent with the Theory of Rational Choices or praxeology, then the generation of value and the superiority of these contracts in relation to any other in which the financier does not have "skin at risk" is demonstrated.
This type of contract aligns the motivations: the financer has a permanent motivation to increase the debtor's income, during the payment period, with financial contributions - such as offering successive contracts for other courses that increase productivity and employability even more) - and not financial - such as getting indications of employment/entrepreneurship, personally guiding or even controlling the debtor through covenants to avoid diseases (such as chemical dependency, obesity and other pathologies) or loss of productivity/health due to bad habits.
In summary:
Would you rather pay 1 #btc for your child's higher education or give 1 btc in multisig as a guarantee for someone in the area (who can guide, control and find a job) to pay for 10% of the income for 30 years after graduation?
Do you prefer that the funders (and consequently customers) of higher education are: a) entrepreneurs aiming to increase the productivity and income of graduates; or, b) governments looking to buy votes, militants and dependency - all maximized if students are failed losers?
If you have a company in any sector and have a godchild, nephew or associate with potential, what do you gain financially by paying for his college without ISA? Now, to keep 10% of his salary for 30 years would not be worth paying for college and courses - in addition to guiding the student and demanding health and life insurance covenants, monitoring, toxicology, exercise, diet and even nootropics depending on the case?
4. Covenants:
A common question to present this type of contract is: what if the debtor, after taking advantage of years of financing, does not pay? how to control your real income?
The control of real income is already usually faced by tax agencies around the world, but in the case of a private contract, the creditor has even more conditions of control of the debtor, either through trust (if he is a person close to the debtor), or by surety (lost in case of non-compliance), or through accessory obligations: the creditor can limit the movement and activities of the debtor until the execution of the contract, can monitor its location, audio and video environments - or require its presence in a predetermined place some hours per day; may require your income statements and access to your accounts or even submitting examinations or carrying out medical treatments (such as toxicology and use of nootropics) or life and disability insurance.
Convenant can also determine under what conditions the debtor can work - reducing the chance of income concealment. If someone finances a student to graduate in Law in Brazil, it is natural that the contract requires that the debtor should limit himself to taking public exams until he passes (avoiding the chance of unreported income).
Now, if the debtor has a partner in the creditor who has every interest in increasing his income - with financial and non-financial contributions - the risk of acting as an opportunist in a contract with him also represents a risk of financial loss (guarantee without state backing and equity and future income in case of state support).
5. Function and justification of the ISA:
If the family has assets to be a guarantor, why not pay for education right away instead of serving as a guarantor? As already explained, contracts are more efficient when the actors have the lowest risk-taking cost - least cost bearer (with more diversification, information and control capacity). In addition, the risk profile of those who yield (income) and increase in equity is diverse.
If the father finances the child's education, he does not have any marginal financial gain (since the children already have maintenance obligations with him, financing his higher education or not) and amplifies the scale of the loss if the son fails in the undertaking. Just by being a guarantor, you reduce risk (keeping your assets if the debtor does not violate the contract, even a failed child) increasing the child's return potential (including a professional part in monitoring, financing and guiding).
With this contract popularized, recruiting, funding and mentoring potential students would become an income-consolidating market (as are bonds, real estate and stocks that have global market values in the hundreds of trillions of US$19) - and investors would have broad motivations to "mine" opportunities, making available a virtually unlimited amount of private resources for education, with market control.
Summary, recommendations and conclusions:
Future income sharing contracts consist of instruments in which the debtor has education financed by the creditor by promising a percentage of his future income for a specified period - as in the example cited 10% for 30 years, but it could also be 5% for 60 years or 15% for 25 years - depending on the negotiation.
By legalizing and guaranteeing the execution of contracts for the division of eventual rents, "inter generational solidarity" can be guaranteed, solving the problems of student financing and social security collapse - also solving many other problems, such as the waste of public resources in courses that do not generate any value, the explosion in education costs (derived from the subsidized offer of credits without quality control of courses or students); and, the instrumentalization of universities in dens of educational militancy, since in the current model most of their income comes from administrative capture instead of actual wealth creation.
The solution to student debt is the guarantee of contracts with economic balance - which is only possible with alignment of interests so that cooperative behaviors are dominant. Without state subsidies and guarantees, large corporations and banks would have no advantage in offering these contracts over relatives, neighbors, professors or the university itself - with idiosyncratic advantages in selecting and controlling students.
The solution to the capitalization problem, in the long run, may be the normalization of fertility (with the dismantling of misandry and welfare laws), but in the long term it is the offer of returns above fixed interest rates (as in the natural returns in markets kept out of legacy).
A contact like this could be guaranteed and made possible by state rules and courts or by the indication in the contract of guarantor, arbitrator and escrow that maintain guarantees of fulfillment of the debtor's obligations in multisig20 (3 of 5 or 4 of 7), in bitcoin (or synthetics collateralized into bitcoin), the ultimate collateral.
The advantages of a parent being a guarantor of such a contract instead of a financier are: first, that it makes an investor more directly interested in increasing their child's eventual income and in assessing their potential (increasing their chance of success and non-financial investment in their offspring); second, that it reduces risk, since if your child does not have relevant income after graduation, he at least keeps the bail deposit if he does not breach the obligation, sharing the cost of a failed child.
When the main funding of universities is derived from the percentage of income of their graduates - and not from government subsidies - then they will have motivation to focus on education that increases value and productivity of students instead of focusing on administrative capture and on training militancy educationalist, even more effective if graduates fail in private markets. These contracts can also serve as market signals for which courses there is a demand for an increase in vacancies and which courses should be closed.
As it is clear in the examples of socialist and Soviet countries that legions of formal masters and doctors with diplomas without real value live on menial activities - or remain unproductive and economically inactive for most of their lives, academic degrees are not synonymous with real education and much less productivity gain or ability to generate wealth. So, based on the exposed data, the recommendations are:
For most people, attending college represents a financial loss, as shown in numbers in references, considering opportunity costs, even in US$ and with negative real interest.
The number of people with the vocation and attributes to gain productivity and value with formal higher education is very small and efforts to democratize its access only demoralize such courses and programs, destroying their value.
The student and his family are usually the least qualified parties to decide whether to study and where - because they have less access to information about courses, comparative attributes and ability to diversify, in addition to deciding emotionally. This is solved by adopting the simple criterion of “if a rational private third party is not willing to finance your course/program, you shouldn't be there, you don't have market demand or personal capacity”. .
Proxies (indicators) of education (higher or literacy) are consequences of wealth and not causes, as Cuba and other socialist and Soviet countries prove.
The next text will deal with how the collapse of the social welfare system (welfare), the end of social security systems (public and private with the collapse of the legacy) and the migration of income and assets to the clouds (making judicial executions unfeasible) creates demand for dowry marriage contracts (comparing Indian, Islamic and Western models) as a mechanism to guarantee food for the spouse and offspring - even more effective than current pensions or past solutions, given the new technological possibilities.