It’s increasingly clear to me that cheaper, better financial services are perhaps only 10% of the formula to creating financial health. Better basic insurance coverage is perhaps another 15%. The overwhelming majority of the solution is tied to more income. More income to tuck away into long-term savings. More income to afford basic cost of living. More income to collectively disburse exogenous financial shocks.
For a majority of Americans, more income must substantially come from their labor. And our labor productivity, of course, has not kept pace with technology since the ’70s. To put some numbers to it, in a recent missive on the cost of basic financial health, I outlined how 48% of the population needs to collectively save $260 billion more per year in order to retire just above the poverty line. Over $300 billion per year is needed to get baseline insurance to the 10% who still lack it. And we have an annual delta of $230 billion to get the 14% of households to 133% of poverty, let alone a living wage.
Most people are both consumers and laborers — two sides of one coin. Technology has done much for the consumer in us, and with time will strip more and more away from our ability to labor. So, whether you believe in a social safety net (as I do) or believe the robots are coming (as I do), we need to give serious consideration to some kind of a universal basic income (UBI). To better understand the financial and cultural implications of UBI, I recently joined the board of the largest basic income experiment in the US, the Compton Pledge. Under the leadership of the sparkling Mayor Aja Brown, we will build on what’s been learned in Stockton and what Andrew Yang hopes to learn in New York.
The jobs that survive will favor higher education. And how to pay for higher education is a mess. A well intentioned federal loan program seems to have made every college president into a big spender. Tuition hikes relative to inflation have been well documented for years. And while in the main a college degree still commands more future income, there are too many casualties. $1.6 trillion of student debt is forcing a generation of Millennials to make impossible choices. They are expected to do worse financially their entire lives. Covid is adding insult to injury.
The Biden administration is thinking hard about what to do. In addition to the merits of student debt forgiveness, not enough attention is paid to creating accountability for colleges. Academic accreditation does not, as far as I can tell, consider the employability of a college’s students. And while of course college provides innumerable lessons outside the classroom, not to mention friends, sports, experimentation and frolicking, only the rich can really entertain those benefits without also requiring a financial return. I’m told we have to save $500K each for our kids to attend a private college a mere decade from now. Relative to other major investments, we lack the tools almost entirely to judge a college’s financial return. Why?
Someone — a company, the government, the blockchain — should collect income data for each college and each major. Plaid and LinkedIn could put a huge dent in this if they wanted to. So could the IRS and the Department of Education. Besides the fact that many colleges would cry foul and lament the end of the august liberal arts tradition, the truth is that there clearly are quite a few schools that don’t have endowments to support need-blind admissions and whose tuition will prove a burden for too many of its graduates. Yale is expensive, but the 500th most competitive private college charges roughly the same tuition, with dramatically worse yield for its hapless clients. In our back of the envelope, this information could allow students, without changing their grades or SAT scores, to pick colleges and majors that deliver better long-term outcomes. Empowering students to select even a slightly better college for their level of qualification, say one that’s in the 30th percentile rather than the 25th, means a difference of $1,000 in increased income every year, or $40K in higher earnings over a career.
Another mechanism to bring accountability to educational outcomes is the income sharing agreement, by which a college or university advances tuition dollars to a student, which are then repaid as a function of the graduate’s annual income for a fixed period of time. Colleges that graduate students earn little or nothing would get little or nothing in repayment. The college’s interests are aligned with the student’s. This idea comes with risks hidden in the fine print, but so does a loan or equity investment. Good actors, such as Vemo Education (Core is an investor in Vemo), sweat the details and design responsible programs with their college clients, explaining the process clearly to students. We think ISA’s present an important innovation to finance higher education.
Visionary Wade Eyerly cofounded Degree Insurance Corporation to insure the future outcomes of colleges’ graduates: kind of an intellectual capital version of episodic insurance. What other models have you seen or are you building to help get the most out of higher education?