Rubio Plan To Fix College-Debt Mess Deserves A Shot

Marco Rubio has taken a lot of heat for endorsing what some have derided as indentured servitude for college students.  

Intriguingly, the plan the Republican presidential candidate is backing is indentured servitude, though strictly voluntary, as he keeps pointing out. It's also one of the more promising solutions to the U.S. student-debt predicament.   

The new method, called income sharing, typically involves a "loan" (I'll explain the quotation marks later) from investors to students. Instead of paying the money back with interest, students contract to pay their investors a set percentage of income for a fixed number of years after graduation.

The concept dates to 1955, when economist Milton Friedman concluded it made no sense to require new graduates to make fixed loan payments when earnings are so low. Instead, he suggested, why not make equity investments in human beings? Investors could finance college students by buying a share in their earnings prospects. Successful graduates, some of whom would pay back more than the initial investment, would compensate for the unsuccessful ones.

As Friedman predicted, critics found the concept of investing in human assets creepy, and his plan failed to catch on in the U.S. But similar approaches were adopted in Australia and other countries. In 2013, Oregon became the first state to adopt a version of income share, and about half the states are now studying the idea.   

The plans are getting a second look by policy experts on the left and the right, other presidential candidates and some colleges. Purdue University, for example, last week signed a letter of intent with Vemo Education, a financial-services company, to explore the agreements. (The school's president, former Indiana Governor Mitch Daniels, was an early backer of the concept.)

The key to making this approach work is in writing laws to protect students from taking too many risks, while making it clear that investors who lose money won't get bailed out by taxpayers. Rubio, who often talks about his struggle to pay off his college debt, has offered legislation in the Senate to give income-share contracts a legal foundation and to make sure borrowers understand what they are getting into.

The agreements aren't really loans because there is no principal balance, interest rate or fixed payment. Students are basically selling equity in their earnings potential. Payments go up when income is high and down when income is low.