November 22 2019

Priceless Education

What’s the benefit of an education? Simply put, it should improve personal lives and society as a whole. Yes, knowledgeable nations have better economic growth, less crime, and live longer and healthier.

Higher education however created something of a debate lately in the US. With increasing tuition fees, return on investment is being squeezed. Our study reveals that undergraduate education has a better IRR than graduate education. In short, assuming a similar linear career path, it is not worth to pay an extra $35k in average for another 2-3 years, for only a 25% upside in first-time salary. Here is the raw data on tuition and wages for young adults between 25-34 from the US National Center for Education Statistics.

While it is clear that a higher skillset doesn’t necessarily command a greater salary, you still might increase considerably your option value for success if you access the right network and gold-plated credentials. And this is precisely the selling point of the best universities. Skills are linear, networks are exponential. In a nutshell, only a few top MBAs are worth it.

There remain two issues at the core of education though: (i) networks are responsible for the discrepancies in the chances of outcome that skills don’t manage to overcome, and (ii) lower IRR results in increasing debt burden for students…a $1.5tn issue for the US as a reminder. So what’s the solution?

Higher education is only valid when it is fit-for-purpose. The bootcamps developed by Ruben Harris, CEO of Career Karma, are a great attempt at teaching in-demand coding skills to increase the future marketability of students. Openclassrooms even reverse-engineered the education model, by offering trainings tailored to the specific needs of an employer, thus making the chances of employment post-graduation 100%. The silver lining is that most of these training could be offered remotely, thus getting rid of the hurdle of geographic determination.

Social network will soon harness the opportunity – and their responsibility – to manufacture social scores, which could form credentials whenever credit scores discriminate too much on revenues, and social conditions. What if Linkedin could provide a diploma-neutral scoring grid of all your hard and soft skills and match them against the will of employers? Tik-Tok, an app famous for its nonsensical content, is also helping education in India, whether this is just an opportunistic marketing ploy, or the right thing to do.

How to finance it? Financing solutions usually discriminate strongly on social origins. To circumvent that, funding could be provided not on who you are but who you could become. Income Sharing Agreements (ISA) already let students obtain a loan against a share of their future income. If priced right, they are a good alternative for interest-paying loans. Besides, we could pull ISA borrowers together in a great securitization exercise to (i) even-out terms across various student profiles, and (ii) allow investors to diversify risks.

Education is priceless but it doesn’t have to be unaffordable.

360 Advisory – Markets