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Methodology to fix College Education

strengthdebate
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5/26/2012 9:19:47 PM
Posted: 4 years ago
The principal-agent problem is an issue that arises frequently in organizations. A clear way to fix it is to have the agents (executive management) have a more active stake in the company (via stock options). A problem also exists in education where the college (agent) and the principals (students) interest are not aligned. The student wants to graduate with a high paying job while the college wants the students money in the form of tuition.

A proposal to fix his situation is to have in lieu of tuition a contract signed where the college would be entitled to a certain % of the students first 5 years of earnings. If the student earned nothing and could not find a job, the college would get nothing. This solution would effectively align their interests.

Thoughts?
strengthdebate
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5/26/2012 9:29:32 PM
Posted: 4 years ago
At 5/26/2012 9:28:05 PM, darkkermit wrote:
the government would never allow that solution. The trend is to pump as many college graduates as possible.

I understand that, I'm just wanting critiques in terms of viability. If it would work as a solution.
darkkermit
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5/26/2012 9:33:17 PM
Posted: 4 years ago
i think the best idea would be to get the government out of higher education and let free-market solutions solve the problem. Human capital contracts would be great solution except the government won't enforce them making any contracts null.
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strengthdebate
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5/26/2012 9:39:06 PM
Posted: 4 years ago
At 5/26/2012 9:33:17 PM, darkkermit wrote:
i think the best idea would be to get the government out of higher education and let free-market solutions solve the problem. Human capital contracts would be great solution except the government won't enforce them making any contracts null.

that would be fine if you had intelligent, rational consumers. You don't in this situation.
darkkermit
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5/26/2012 9:45:50 PM
Posted: 4 years ago
At 5/26/2012 9:39:06 PM, strengthdebate wrote:
At 5/26/2012 9:33:17 PM, darkkermit wrote:
i think the best idea would be to get the government out of higher education and let free-market solutions solve the problem. Human capital contracts would be great solution except the government won't enforce them making any contracts null.

that would be fine if you had intelligent, rational consumers. You don't in this situation.

The free-market and your solution If successful, would make things cheaper so there's no reason to believe this would fail because of "unintelligent consumers".

If the problem is always "unintelligent consumers" why not just provide a socialist society in which the government will provide goods/services to people since normal consumers are too stupid to know what's best for them.
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strengthdebate
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5/26/2012 10:05:46 PM
Posted: 4 years ago
At 5/26/2012 9:45:50 PM, darkkermit wrote:
At 5/26/2012 9:39:06 PM, strengthdebate wrote:
At 5/26/2012 9:33:17 PM, darkkermit wrote:
i think the best idea would be to get the government out of higher education and let free-market solutions solve the problem. Human capital contracts would be great solution except the government won't enforce them making any contracts null.

that would be fine if you had intelligent, rational consumers. You don't in this situation.

The free-market and your solution If successful, would make things cheaper so there's no reason to believe this would fail because of "unintelligent consumers".

If the problem is always "unintelligent consumers" why not just provide a socialist society in which the government will provide goods/services to people since normal consumers are too stupid to know what's best for them.

College's have no incentive to provide information about the effectiveness of their programs or alter their revenue strategy from tuition to % of income. By having a tuition based system with many applicants not getting jobs and many applicants being too stupid to understand that a plethora of majors will not yield jobs, colleges maximize profits.
darkkermit
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5/26/2012 10:10:47 PM
Posted: 4 years ago
At 5/26/2012 10:05:46 PM, strengthdebate wrote:
At 5/26/2012 9:45:50 PM, darkkermit wrote:
At 5/26/2012 9:39:06 PM, strengthdebate wrote:
At 5/26/2012 9:33:17 PM, darkkermit wrote:
i think the best idea would be to get the government out of higher education and let free-market solutions solve the problem. Human capital contracts would be great solution except the government won't enforce them making any contracts null.

that would be fine if you had intelligent, rational consumers. You don't in this situation.

The free-market and your solution If successful, would make things cheaper so there's no reason to believe this would fail because of "unintelligent consumers".

If the problem is always "unintelligent consumers" why not just provide a socialist society in which the government will provide goods/services to people since normal consumers are too stupid to know what's best for them.

College's have no incentive to provide information about the effectiveness of their programs or alter their revenue strategy from tuition to % of income. By having a tuition based system with many applicants not getting jobs and many applicants being too stupid to understand that a plethora of majors will not yield jobs, colleges maximize profits.

The enforcement is in the profit motive of banks and financial institutions. Banks and financial institutions would discount interest rates based on major, and school If it were up to the free market.
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strengthdebate
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5/26/2012 10:11:20 PM
Posted: 4 years ago
At 5/26/2012 9:45:50 PM, darkkermit wrote:
If the problem is always "unintelligent consumers" why not just provide a socialist society in which the government will provide goods/services to people since normal consumers are too stupid to know what's best for them.

The problem isn't always unintelligent consumers. Just in rare instances like the selection of a major, reading the job placement rate for colleges and median salaries, etc. Despite parents spending most of the money, they do very little research on these topics and tend to have a "do whatever you're passionate about" attitude. This unrational consumer behavior upheaves the free market and creates a market failure.
strengthdebate
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5/26/2012 10:12:45 PM
Posted: 4 years ago
At 5/26/2012 10:10:47 PM, darkkermit wrote:
At 5/26/2012 10:05:46 PM, strengthdebate wrote:
At 5/26/2012 9:45:50 PM, darkkermit wrote:
At 5/26/2012 9:39:06 PM, strengthdebate wrote:
At 5/26/2012 9:33:17 PM, darkkermit wrote:
i think the best idea would be to get the government out of higher education and let free-market solutions solve the problem. Human capital contracts would be great solution except the government won't enforce them making any contracts null.

that would be fine if you had intelligent, rational consumers. You don't in this situation.

The free-market and your solution If successful, would make things cheaper so there's no reason to believe this would fail because of "unintelligent consumers".

If the problem is always "unintelligent consumers" why not just provide a socialist society in which the government will provide goods/services to people since normal consumers are too stupid to know what's best for them.

College's have no incentive to provide information about the effectiveness of their programs or alter their revenue strategy from tuition to % of income. By having a tuition based system with many applicants not getting jobs and many applicants being too stupid to understand that a plethora of majors will not yield jobs, colleges maximize profits.

The enforcement is in the profit motive of banks and financial institutions. Banks and financial institutions would discount interest rates based on major, and school If it were up to the free market.

Psht do you seriously think that the underwriters at the banks would even allow someone without any assets and no job to have a loan with no co-writers? They would simply have their parents cosign and then if they default, seize their parents assets.
darkkermit
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5/26/2012 10:13:41 PM
Posted: 4 years ago
At 5/26/2012 10:11:20 PM, strengthdebate wrote:
At 5/26/2012 9:45:50 PM, darkkermit wrote:
If the problem is always "unintelligent consumers" why not just provide a socialist society in which the government will provide goods/services to people since normal consumers are too stupid to know what's best for them.

The problem isn't always unintelligent consumers. Just in rare instances like the selection of a major, reading the job placement rate for colleges and median salaries, etc. Despite parents spending most of the money, they do very little research on these topics and tend to have a "do whatever you're passionate about" attitude. This unrational consumer behavior upheaves the free market and creates a market failure.

I'd say that the consumer cares also about elitism as well as job salary.
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darkkermit
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5/26/2012 10:20:26 PM
Posted: 4 years ago
At 5/26/2012 10:12:45 PM, strengthdebate wrote:
At 5/26/2012 10:10:47 PM, darkkermit wrote:
At 5/26/2012 10:05:46 PM, strengthdebate wrote:
At 5/26/2012 9:45:50 PM, darkkermit wrote:
At 5/26/2012 9:39:06 PM, strengthdebate wrote:
At 5/26/2012 9:33:17 PM, darkkermit wrote:
i think the best idea would be to get the government out of higher education and let free-market solutions solve the problem. Human capital contracts would be great solution except the government won't enforce them making any contracts null.

that would be fine if you had intelligent, rational consumers. You don't in this situation.

The free-market and your solution If successful, would make things cheaper so there's no reason to believe this would fail because of "unintelligent consumers".

If the problem is always "unintelligent consumers" why not just provide a socialist society in which the government will provide goods/services to people since normal consumers are too stupid to know what's best for them.

College's have no incentive to provide information about the effectiveness of their programs or alter their revenue strategy from tuition to % of income. By having a tuition based system with many applicants not getting jobs and many applicants being too stupid to understand that a plethora of majors will not yield jobs, colleges maximize profits.

The enforcement is in the profit motive of banks and financial institutions. Banks and financial institutions would discount interest rates based on major, and school If it were up to the free market.

Psht do you seriously think that the underwriters at the banks would even allow someone without any assets and no job to have a loan with no co-writers? They would simply have their parents cosign and then if they default, seize their parents assets.

Yes, i would because the degree promises high rate of return. Furthermore they'd still rather the person pay because liquidation of assets can be expensive. There are other financial instruments that could be available besides loans as I said before (human capital contract).
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strengthdebate
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5/26/2012 10:39:36 PM
Posted: 4 years ago
At 5/26/2012 10:20:26 PM, darkkermit wrote:
liquidation of assets can be expensive.

Hardly. If someone has money to pay for their kid to go to college, I'd say its extremely likely that most of their assets are easily made liquid without any admin cost.
darkkermit
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5/26/2012 11:29:26 PM
Posted: 4 years ago
At 5/26/2012 10:39:36 PM, strengthdebate wrote:
At 5/26/2012 10:20:26 PM, darkkermit wrote:
liquidation of assets can be expensive.

Hardly. If someone has money to pay for their kid to go to college, I'd say its extremely likely that most of their assets are easily made liquid without any admin cost.

Well the liquid assets would be in a house which is still quite expensive to buy and sell.

Plus, as I said earlier, there are other financial instruments. Why can't the debt be unsecured?
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strengthdebate
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5/26/2012 11:43:34 PM
Posted: 4 years ago
At 5/26/2012 11:29:26 PM, darkkermit wrote:
At 5/26/2012 10:39:36 PM, strengthdebate wrote:
At 5/26/2012 10:20:26 PM, darkkermit wrote:
liquidation of assets can be expensive.

Hardly. If someone has money to pay for their kid to go to college, I'd say its extremely likely that most of their assets are easily made liquid without any admin cost.

Well the liquid assets would be in a house which is still quite expensive to buy and sell.

Plus, as I said earlier, there are other financial instruments. Why can't the debt be unsecured?

Uhh or just in retirement accounts/cars? Why can't debt be unsecured? Because no bank is batshit crazy that's why.
darkkermit
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5/26/2012 11:49:41 PM
Posted: 4 years ago
At 5/26/2012 11:43:34 PM, strengthdebate wrote:
At 5/26/2012 11:29:26 PM, darkkermit wrote:
At 5/26/2012 10:39:36 PM, strengthdebate wrote:
At 5/26/2012 10:20:26 PM, darkkermit wrote:
liquidation of assets can be expensive.

Hardly. If someone has money to pay for their kid to go to college, I'd say its extremely likely that most of their assets are easily made liquid without any admin cost.

Well the liquid assets would be in a house which is still quite expensive to buy and sell.

Plus, as I said earlier, there are other financial instruments. Why can't the debt be unsecured?

Uhh or just in retirement accounts/cars? Why can't debt be unsecured? Because no bank is batshit crazy that's why.

Except college has a positive NPV, especially w/ the right majors and student loans are already unsecured.
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strengthdebate
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5/26/2012 11:51:54 PM
Posted: 4 years ago
At 5/26/2012 11:49:41 PM, darkkermit wrote:
Except college has a positive NPV, especially w/ the right majors and student loans are already unsecured.

wtf are you even talking about. The government secures it currently. Also why the hell would the banks care about the NPV on a students salary and what the hell would incentize them to take on that additional risk. In case you haven't figured out, the discount rate you use has a multiplier (beta) that is essentially the risk rate. If you take on the risk of a student defaulting/not getting a job you have a discount rate that causes a negative NPV.
strengthdebate
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5/26/2012 11:53:49 PM
Posted: 4 years ago
banks by law currently aren't even allowed to take on a certain amount of equity (which is what your advocating) unless they're investment banks. And do you seriously believe that they would dabble in an almost insurance like model? Hardly. their WACCS would easily cause that future profit to be negative NPV.
darkkermit
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5/27/2012 12:06:34 AM
Posted: 4 years ago
At 5/26/2012 11:51:54 PM, strengthdebate wrote:
At 5/26/2012 11:49:41 PM, darkkermit wrote:
Except college has a positive NPV, especially w/ the right majors and student loans are already unsecured.

wtf are you even talking about. The government secures it currently. Also why the hell would the banks care about the NPV on a students salary and what the hell would incentize them to take on that additional risk. In case you haven't figured out, the discount rate you use has a multiplier (beta) that is essentially the risk rate. If you take on the risk of a student defaulting/not getting a job you have a discount rate that causes a negative NPV.

I forgot that the government secured it. The average NPV is positive though, so it would take into consideration that people will default. The interest rate would be higher for unsecured risk. However credit cards are unsecured risks that banks freely give out to customers.
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strengthdebate
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5/27/2012 12:11:37 AM
Posted: 4 years ago
At 5/27/2012 12:06:34 AM, darkkermit wrote:
The average NPV is positive though, so it would take into consideration that people will default. The interest rate would be higher for unsecured risk.

Do you even have a clue of what an NPV is or how you get to it? There is this thing called a discount rate. The discount rate is normally a companies WACC on the project itself.

http://www.investopedia.com...

http://www.investopedia.com...

Ra=Re

Beta = Market Risk. i.e. chance of defaulting.
However credit cards are unsecured risks that banks freely give out to customers.
strengthdebate
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5/27/2012 12:14:49 AM
Posted: 4 years ago
At 5/27/2012 12:06:34 AM, darkkermit wrote:
However credit cards are unsecured risks that banks freely give out to customers.

1. Apparently you've never heard of a credit rating
2. Have you ever looked into the EPR on credit cards?
3. Do you realize there is thing called a credit limit and if you have no assets/income you will be able to spend at max 200 bucks.
darkkermit
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5/27/2012 12:17:59 AM
Posted: 4 years ago
At 5/27/2012 12:11:37 AM, strengthdebate wrote:
At 5/27/2012 12:06:34 AM, darkkermit wrote:
The average NPV is positive though, so it would take into consideration that people will default. The interest rate would be higher for unsecured risk.

Do you even have a clue of what an NPV is or how you get to it? There is this thing called a discount rate. The discount rate is normally a companies WACC on the project itself.

http://www.investopedia.com...

http://www.investopedia.com...

Ra=Re

Beta = Market Risk. i.e. chance of defaulting.
However credit cards are unsecured risks that banks freely give out to customers.

The way I learned how to do a NPV:

NPV = sum[(cash flow at n)/(1+i)^n]
n = year
i = interest rate

If NPV is positive, than invest. If it is negative then you don't invest.
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strengthdebate
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5/27/2012 12:25:33 AM
Posted: 4 years ago
At 5/27/2012 12:17:59 AM, darkkermit wrote:
At 5/27/2012 12:11:37 AM, strengthdebate wrote:
At 5/27/2012 12:06:34 AM, darkkermit wrote:
The average NPV is positive though, so it would take into consideration that people will default. The interest rate would be higher for unsecured risk.

Do you even have a clue of what an NPV is or how you get to it? There is this thing called a discount rate. The discount rate is normally a companies WACC on the project itself.

http://www.investopedia.com...

http://www.investopedia.com...

Ra=Re

Beta = Market Risk. i.e. chance of defaulting.
However credit cards are unsecured risks that banks freely give out to customers.

The way I learned how to do a NPV:

NPV = sum[(cash flow at n)/(1+i)^n]
n = year
i = interest rate

If NPV is positive, than invest. If it is negative then you don't invest.

whoever taught you should be flayed.

NPV = Sum( Cash Flow present time + Cash Flow 1/(1+i)^1) + Cash Flow 2/(1+i)^2)+....+Cash Flow n/(1+i)^n)

i= WACC of company using a project specific beta.

X amount of years of abnormal cash flow are projected and discounted and at the stable period in future, a terminal value is assigned and is done via perpetuity to get the NPV.
strengthdebate
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5/27/2012 12:30:44 AM
Posted: 4 years ago
WACC = E/(E+D) * RE + D/(E+D) * RD * (1- Tc)

E= Equity amount of company
D= Debt amount of company
Rd = company's interest rate on debt
Tc = effective tax rate of company
re = rf + Bp (rm - rf)

rf = risk free rate = US comparable bond rate using bond duration that has same duration as the project. If 10 year project then 10 year US Treasuries are used, etc.

Rm = Return on market, typically 8% is used

Bp = Project specific beta = Cov(rp, rm)/var(rm)

rp = return on the project.
strengthdebate
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5/27/2012 12:33:34 AM
Posted: 4 years ago
the terminal value of the project is valued by doing a perpetuity

X = the consistent cash flow you expect the company to return when stable
i = Project specific WACC

X/i = terminal value
darkkermit
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5/27/2012 1:18:45 AM
Posted: 4 years ago
At 5/27/2012 12:25:33 AM, strengthdebate wrote:
At 5/27/2012 12:17:59 AM, darkkermit wrote:
At 5/27/2012 12:11:37 AM, strengthdebate wrote:
At 5/27/2012 12:06:34 AM, darkkermit wrote:
The average NPV is positive though, so it would take into consideration that people will default. The interest rate would be higher for unsecured risk.

Do you even have a clue of what an NPV is or how you get to it? There is this thing called a discount rate. The discount rate is normally a companies WACC on the project itself.

http://www.investopedia.com...

http://www.investopedia.com...

Ra=Re

Beta = Market Risk. i.e. chance of defaulting.
However credit cards are unsecured risks that banks freely give out to customers.

The way I learned how to do a NPV:

NPV = sum[(cash flow at n)/(1+i)^n]
n = year
i = interest rate

If NPV is positive, than invest. If it is negative then you don't invest.

whoever taught you should be flayed.

NPV = Sum( Cash Flow present time + Cash Flow 1/(1+i)^1) + Cash Flow 2/(1+i)^2)+....+Cash Flow n/(1+i)^n)

The same equation I have above.

i= WACC of company using a project specific beta.

X amount of years of abnormal cash flow are projected and discounted and at the stable period in future, a terminal value is assigned and is done via perpetuity to get the NPV.
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