The purpose of education
A speech by fictional
Yale President Arvind Nagarajan
Thank you for being here today as I address all of Yale’s stakeholders on the future of this fine University. I thought I would use income share agreements as the motif of this particular speech. For those of you who know me as an economics major and former investor, perhaps my choice comes as no surprise.
Some background: income share agreements essentially represent a change from debt to equity to fund something. In this case, that something takes the form of higher education (from vocational to liberal arts). Traditionally, if you can’t afford the high cost of college, you take on debt that must be repaid. As the price of higher education has exploded, so too has total student debt. Income share agreements (ISAs) allow students to take on equity investors instead of debt. An ISA provider covers the cost of the student’s education in exchange for a percentage of their income in the future. There is significant variation on the percentage of income, the time period of that repayment, and any cap on the total repayment amount, but this is the general idea.
Within ISA providers, there are two main camps: those that provide the education themselves, like Lambda School, which is a coding bootcamp that defers tuition in exchange for a share of future income. Then, there are those that provide a pure ISA, like Blair, paying your tuition at a college or university in exchange for a share of your future income. The main innovation here is the ISA itself – a fundamental risk shift from debt to equity.
Now, I have been asked for my comments on income share agreements, or ISAs, many times. The general question being some variant of:
Are ISAs the future of higher education? Will they disrupt the traditional college and university?
I’ve never formulated a good answer to that question. Because, while I do recognize the disruptive and innovative elements of ISAs, something has felt unsettling about the structure. I couldn’t put my finger on it until recently.
The reason why ISAs have come about in higher education (predominantly through Silicon Valley) is outsiders see a field ripe for disruption. They see a college and university space that is totally overpriced and seems to lack any meaningful accountability for the outcomes they provide.
But, to understand my personal view on ISAs, I must first explain what I think these ISAs are really disrupting. I believe that the foundation of ISAs rests on two fundamental principles, one of which I have come to agree with and one of which I vehemently disagree with.
The first principle is that college education is totally overpriced.
Now, this may be a revelation coming from the sitting President of one of the highest-priced universities in the world, but I couldn’t agree more with this principle. Upon reflection, I think we have gone way too far in pricing higher education and have been derelict in our duties. I will come back to what I think should be done, but suffice it to say, I completely agree with this premise.
The second principle of ISAs is that money is the purpose of education.
This principle may not be one you see advertised on the websites of these companies, but make no mistake: this is a foundational principle of those who believe in ISAs. They couch this belief in talk of ‘aligning incentives’ and ‘accountability and transparency in terms of outcomes’. This is euphemistic talk that belies a belief that the purpose of higher education is for you to earn more money.
On this principle, I could not disagree more strongly.
Money is an outcome of education. Money is not the purpose of education.
The purpose of education is to help individuals lead safe, happy, and purposeful lives.
Is this purely semantic? Is this distinction important?
I believe it is incredibly important. ISAs do a great job of aligning incentives. They align incentives of the provider and the student around money as the return. Don’t get me wrong, money may well be a necessary component to leading a safe, happy, and purposeful life, but it is far from sufficient.
Let me speak like an economist here. The more widespread income is in society and the less labor is involved in the production of goods, the less important income is as a measure of the value of education. With artificial intelligence and the proliferation of technology, we are moving in a direction with more widespread income and less labor. We can disagree about the pace, but we are moving in this direction. Ultimately, we should get to a place where we create so much wealth and live so much more consciously that the income coming out of our education is way less important than the effects of an education on our character and mind.
Today, you don’t need a college degree to have the money to buy a cell phone. I believe our society ought to be structured such that you don’t need a college degree to have the money to lead a safe, happy, and purposeful life.
Now, what was the point of this long preamble? What does this mean for our strategy at Yale? Namely, how do we acknowledge principle 1 (college is overpriced) while rejecting principle 2 (money is the purpose of education)?
Well, I feel like I can say this given my ethnic background, but who knows what you can say in this day and age? Yale, like many of the other premier institutions of higher education around the world, has been saving like an Asian family. We earn more and more money but, like Asian families, we either save it (in our growing endowments) or spend it on our children (the wages of our professors or our facilities). We almost never spend on ourselves (the actual education we provide).
Or, to put it more generously, we have been saving for a rainy day. And that rainy day is here.
So, let me first proudly state as the President of Yale,
We proudly exist to serve the purpose of learning. The true purpose of learning - as a tool for leading happier, more meaningful lives. Income happens to be one great side effect of the quality education we provide, but it is definitively not the purpose. Not even close.
Now, I recognize we haven’t done enough to provide that quality education cost-effectively. Our prices have gotten out of hand and the scarcity is all too real.
Today, I announce three plans to address this:
Part 1: It is time to start spending down endowments instead of growing them. We will no longer raise any money for our endowments or for capital campaigns. We will dramatically lower the cost of a Yale education and will subsidize any losses through donors or our endowment.
When you get a Yale education, you will likely have a great income. For some of you, you may even have fabulous levels of income. But your income is not our purpose. We want you all to lead safe, happy, and purposeful lives. If you do, and if you credit our education for an important role in that, we are confident you will support us in doing the same for others. You may ask why not provide our own ISAs. If you’re asking that, you haven’t been listening.
We are betting on your future donations, not your future income. That’s truly aligning incentives.
Now, you might be saying Yale is in a privileged position. We have the benefit of a large endowment unlike most colleges and universities struggling for survival. Well, that brings me to the second part of my plan.
Part 2: Today, I announce a new investment plan for our Yale endowment. Today, we are committing $3 billion of our endowment to investing in other universities.
We believe the Silicon Valley culture has become emblematic of a push towards profit disguised as purpose. We invest billions into venture capital without recognizing their pernicious effects on our very institutions of learning. Therefore, we are reallocating the ‘alternative investment’ category of our endowment, effective immediately.
Instead, our investment in universities represents our own unique form of an income share agreement. Any university in America is welcome to apply. The only qualifying criteria is the tuition you charge students. We will be investing in the programs of these institutions with money and expertise and will ask for our return as a percentage of revenue on the back end, starting in a decade. We say to anyone who applies – lower your costs, improve the education you provide, not in terms of income but in terms of developing people, and we are confident we’ll get returns in the long run to merit our investment.
Now, the idea of developing people brings me to the third and final part of our plan.
Part 3: We are announcing a $1 billion investment in student loan forgiveness. This will not be directed at Yale graduates - instead, a random lottery will determine recipients.
What do we ask for in exchange? All that we ask is that you take some time to reflect on the purpose of education and make educational decisions for you and your family accordingly. If this money can jump-start a collective reckoning around the core values in our education system, it will be an investment worth making.
Some may say this plan is foolhardy. But the times are changing.
Yale can sit on its perch atop this mountain we call higher education, or we can recognize that societal forces may eventually turn this mountain into a molehill if we don’t defend the purpose of education.
Thank you for your time. I welcome any questions.