Directions: Read the following passage and answer the questions that follows.
In Britain, recently, there have been reforms about twice a decade; the last one, which hiked tuition fees, all but killed off the Liberal Democrats, members of the previous coalition government. In America, concerns abound over soaring costs and towering student debts. As a result, presidential candidates have been weighing in with plans to overhaul the system.
Why should the state support students in the first place? One argument is that society benefits from educated citizens, who pay more taxes, generate more jobs and help to advance human knowledge. Typically, such social gains justify subsidies. But the private returns to many degrees are juicy enough to encourage would-be students without a subsidy. The New York Fed reckons that a bachelor’s degree provides a 15% return on investment.
A better argument is that a purely private market for funding college would probably struggle. Despite the rosy averages, not all graduates succeed, so borrowing to pay for college is a gamble. Students do not know what job opportunities they will have later on; lenders must guess whether a 20-year-old will become a banker or a busker. Asset-poor youngsters cannot post collateral to compensate lenders for the risk. Unable to raise cash, poor students would be locked out of education without state support.
Governments can help spread these risks around. One option is to fund higher education fully, as many European countries do (the downside being that poor taxpayers subsidise successful graduates). Another is to offer loans on more generous terms than banks. For instance, governments can make repayments conditional on graduates earning a decent income, and collect the money like an additional income tax. Australia pioneered this approach in the early 1990s; Britain has since followed. Today, Hillary Clinton promises to expand America’s hodgepodge of “income-based repayment” schemes if she becomes president.
There are two problems with these schemes. First, taxpayers shoulder some risk, bailing out those who never earn enough to repay. Second, the incentives are skewed. Universities can sell dubious courses at a high price to students who do not care that the degree may not boost their earnings—as the taxpayer will foot the bill. When Britain trebled its cap on tuition fees in 2011, the government promised universities would charge the maximum only in “exceptional circumstances”. But two-thirds of universities—including many middling ones—immediately priced at the cap.
Can these problems be overcome? Marco Rubio, a Republican candidate for president, wants income-based repayment with a twist. Instead of borrowing to pay for college, students could sell a percentage share of their future income to private investors, and use the proceeds to fund their studies. Students’ liabilities would then resemble equity rather than debt.
This idea—which was floated by Milton Friedman in 1955—has several advantages. Students do not face too much risk; if they earn only a pittance, they pay little. But investors will not fund a booze-up; if a course fails to add value, students will be unable to raise enough cash to enroll.
Investors, though, would still face uncertainty over a student’s ability and career intentions. To resolve this, they would need to invest in a whole cohort of apparently similar students, to be sure of backing both high-rollers and hipsters. That might be easier said than done. Income-contingent financing will appeal most to students who expect low incomes; it is most expensive for the highest earners. If students can choose whether to participate, few wannabe-bankers will sign up (although an upper limit on lifetime payments might mitigate this).
Adverse selection plagued an experiment with equity financing at Yale University. In the 1970s around 3,300 undergraduates there agreed to pay 4% of their annual income for every $1,000 of funding they received until the entire group’s fees were paid. But students who expected future riches had no incentive to sign up in the first place to what was in effect an income-redistribution scheme. Worse, those who did take the money could later buy themselves out too cheaply. Alumni were still stumping up a quarter of a century later, and Yale had to terminate the plan.
Unlike the Yale students, investors would see this problem coming, threatening the viability of the contracts from the outset. But they could make their offers more attractive to the best students. For instance, Upstart, a peer-to-peer lending platform that has dabbled in equity financing, predicts students’ future income based on their academic background and area of study. That could enable bright students to agree a more favourable income-sharing agreement, lessening the adverse-selection problem.
To help limit adverse selection, the government might also gradually withdraw subsidised loans, which the best students will usually prefer to equity. The main role for government would then be to help to collect payments through the tax system, as the administrative burden of monitoring incomes would be too great for investors to bear.
That day is a very long way off. In the meantime, a final problem haunts all income-based repayment schemes: moral hazard. With repayments linked to income, graduates are discouraged from working. In Britain, student-loan repayments mean most graduates face a steep marginal tax rate of 41%. Repayments that must be made come-what-may do not create this problem (American student debts persist even through bankruptcy). That means the optimal financing mix for students—as with companies—is probably some mix of discipline-inducing debt and flexible equity. On the path to the perfect scheme, pitfalls abound. But Mr Rubio’s idea is a good start.
Students are unsure about their job opportunities.
Everyone can’t afford collateral to support their loans.
Lenders should know what a student is going to become.
All of these
None of these
2. How, according to the passage, government can be helpful to students to curb their financial problem?
converting repayments into income tax
offering loans on generous terms
funding higher education, fully
All of these
None of these
3. Define: “booze-up”
psychotic
senseless
drunkard
benign
None of these
4. What are the advantages of the idea of “selling a share of students’ future income to private investors”?
Risk Free
Repayment is proportional to Income
Investors will fund a booze-up
Both A & B
None of these
5. What is the most appropriate antonym of “floated”:
levitated
soared
swamped
wafted
None of these
6. What is the tone of the passage?
Ethical
Grandiose
Apathetic
Informative
None of these
7. What is the most appropriate title of the passage?
Funds for Higher studies
Education Funding
Graduate Stock
Both B & C
None of these
8. What is the similarity between ongoing debate in America and England ?
funding higher education
II. reforms in education sector
III. concerns over increasing debts
Only I
Only II
Only III
All of the above
None of these
9. What are the benefits of a society to support its students?
educated students produce educated progeny
II. generate subsidies
III. generate jobs
Only I
Only II
Only III
All of the above
None of these
10. What is the most appropriate synonym of “rosy”:
Pallid
Livid
Achromatic
Upbeat
None of these
Answers
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