Investing in America’s education future: how to offer nearly-free tuition using minimal taxes
by Steven Hill, January 15, 2025
Skyrocketing student loan debt—$1.6 trillion for more than 45 million borrowers—is a significant burden on America’s future. It especially impacts middle and lower-income families, with a Department of Education analysis finding that the typical undergraduate student now graduates with tens of thousands of dollars in debt. No other advanced democracy in the world has established a higher education system in which young people exit college with so much debt that, in some cases, leaves them financially strapped for decades.
Despite this affordability crisis, in the final days of the Biden administration it struggled to retain its Saving on a Valuable Education (SAVE) Plan to reduce student debt. President Biden has done more than any previous president to assist student-borrowers with their loan burdens, but with a price tag of $475 billion over ten years his SAVE plan proved to be controversial, especially considering many other competing societal needs and demands on government revenues.
But what if there was a way to pay for a student’s tuition without either indebting the students or costing the federal government, i.e. taxpayers, much money?
In fact, there is. By deploying the same financing strategies used by major corporations, university endowments, the Social Security Trust Fund, Employee Stock Ownership Plans (ESOPs), wealthy investors and the Alaska Permanent Fund, it is possible to design a financing mechanism for paying off student loans that would cost only a quarter of Biden’s SAVE Plan, and would retire a student-borrower’s individual debt burden in half the time.
Called the Youth Education Security (YES) Fund, it would catalyze ongoing wealth creation from various investment portfolios (real estate, stocks and bonds, commodities, etc.). The future returns from those investments then would be deployed to pay off student-borrower debt loads while using very little of taxpayer dollars.
Owners by the millions
There is a tradition and a history that helps explain why this democratic proposal for widespread student loan repayment is possible. In the 1970s, San Francisco-based investment banker-attorney and best-selling author Louis O. Kelso proposed a number of financing vehicles capable of diffusing wealth creation to greater swaths of the American population. Kelso was a charismatic and debonair personality, whose passionate vision attracted national media attention and inspired followers, particularly over his best-known and most successful invention, the ESOP – Employee Stock Ownership Plan — in which capital ownership of tens of thousands of companies has been diffused to each company’s employees.
Kelso played a catalytic role in the passage of the federal law for ESOPs, appearing on 60 Minutes and being profiled by Time, Bill Moyers, the New York Times and many other media outlets. Kelso evangelized about his bi-partisan vision for how all Americans could get a piece of the pie by broadly distributing the benefits of future returns investments. Today, nearly 14 million US workers are covered by ESOPs, almost as many as are members of labor unions, and ESOPs distribute a total of $126.7 billion annually and hold an estimated $2.1 trillion in value, an average of $129,521 per worker-owner.
While ESOPs benefit the employees of a particular company, Kelso proposed other financing vehicles as part of a broader vision for “universal capitalism” designed to include more sectors of society in the ownership of key capital assets. These financing mechanisms have been deployed to pay for any number of societal needs while using minimal taxpayer dollars. Kelso was able to, for example, use these financing techniques to help a co-op of farmers in the Central Valley of California to receive bank loans that financed the purchase of their own fertilizer plant that got them out from under the corporate boot heel of exploitative oil companies that monopolized the fertilizer industry. The farmers paid off the bank loan in record time from the profits earned from their fertilizer plant investment, even as they managed to drastically reduce the cost of fertilizer.
The Youth Education Security (YES) Fund draws from the same financing principles that guided the trust established by the farmer co-op to finance the purchase of their fertilizer plant. It would establish a trust and would use US Treasuries as the initial seed money for investment. After about 10 years of returns on the investments, the Treasury bond holders would be paid off and, based on a historical average of investment returns, there would be sufficient remaining funds to begin paying off generous amounts of individual students’ loans. All while using a minimal amount of taxpayer dollars.
Federal-state partnerships could pave the way
A plan like this in turn opens up still more possibilities, such as re-visioning how the federal government can partner with willing states to pay off student expenses. Besides tuition, some students need help with ancillary costs such as housing, books, health fees, transportation, school supplies (such as a laptop) and more. A closer look at New Mexico’s student assistance program shows how a voluntary federal-state partnership could foster affordable post-secondary education and vocational training opportunities for tens of millions of young people. New Mexico generously allocates almost 1 percent of the state’s budget toward covering tuition and fees for any New Mexico high schooler at one of the state’s public universities, community colleges and tribal colleges. New Mexico now ranks as the second-largest oil producing state in the country behind Texas, with revenue of $15.2 billion in fiscal year 2023, eclipsing North Dakota and Alaska. The ongoing plan is to pour oil revenues into funding the free tuition program, certainly a powerful investment in the state’s future. Yet that is not the best use of the state’s petrodollars.
Instead, New Mexico could create its own version of the YES Fund by creating a state Education Trust which would invest a hefty sum of its oil revenues each year in a diversified portfolio of stocks, bonds, real estate or other investments. The future returns on this investment would then be used to supercharge its own state YES Fund. Since New Mexico would be using oil revenues to fund the original investment, it would not have to repay investors so the fund would compound very quickly and reach maturity faster than the federal program outlined above. In effect, New Mexico would be able to double its money in a relatively short period of time, allowing it to pay for not only higher education for its residents but for other public services as well.
A Youth Education Security (YES) Fund at federal and/or state levels has great potential to create opportunities to assist young Americans in ensuring that their higher education experience is a doorway to their bright future, instead of a millstone of debt around their necks that undermines America’s middle class society.
Note: Here is a link to the policy paper from the New Democracy Institute which explains how the YES Fund would work, including a number of diagrams that illustrate the funding mechanism (pages 7-9)
Investing in America’s future: meeting the imperative for affordable higher education
PDF version with diagrams https://newdemocracyinstitute.org/wp-content/uploads/2024/04/Universal-capitalism-for-affordable-higher-education-23-I-2024.pdf