Tying Tuition To Paychecks

Oregon college students may soon be able to pay for college by pledging a percentage of future earnings rather than paying tuition upfront. Dylan Matthews provides details:

The actual bill text is very spare and doesn’t specify a set percentage or payment period, though the bill’s supporters tell the New York Times that something like 3 percent over 20 years would cover costs. And [John Burbank of the Economic Opportunity Institute] is quick to note that there would be some substantial upfront transition costs, which, for universal adoption in Oregon, are estimated at $9 billion. “25 years from now, it will be self-financing,” he says. “The question is, ‘How do we get there?’”

It’s a big question. Oregon’s commission will have to figure out not only what rate to charge and how long to charge it, but whether one can take a “buyout” by paying off tuition costs early, as is possible with student loans, and how to enforce the plan for students who move out of state. If you can’t take a buyout, then students who earn high incomes later on could find themselves paying far, far more than their education actually cost. And if enforcement is tougher in Oregon than out of state, that could provide a perverse incentive for state university graduates to skip town.

Michelle Asha Cooper lodges other criticisms:

[P]utting aside the complexity and feasibility of implementing such a system, this supposedly “debt-free” plan only covers tuition and fees, which is less than half of the costs most students incur while in college. Furthermore, the plan could have a negative impact on efforts to ensure equal opportunity in higher education because it may encourage recruiting practices that identify students on the likelihood of future employability, limiting access to our nation’s most underserved students.

Tony Lima doubts the Oregon experiment will work:

[A]ssume there are two types of students.

One type (S) majors in art, English composition, history, and ethnic studies.  The other (H) majors in mathematics, hard science, engineering, or even economics.  While type S individuals may not know it, their major will, on average, result in lower lifetime income than those in group H.  Type S individuals will happily accept Oregon’s offer since three percent of their income over 20 years is a good deal.  Type H individuals, however, are likely to think that three percent of their income is a high price to pay.  They will seek alternative methods of financing their education, paying the standard tuition and fees.  (This proposal could, in fact, revive the private student loan market — but without government intervention.)

Result: Oregon will collect far less than they are predicting.  The percentage of income will rise and the duration of the loan will also increase — to 25 years, then 30 years.

Richard Vedder wants to tweak the proposal:

A more successful approach would vary the percent and length of the payback on the investment with the student prospects for financial success, as measured by probability of, say, successfully completing a degree (as predicted by high school grades and ACT/SAT test scores) and the earnings experience of the student’s major. While less politically popular, this would make the program more financially viable.

Still, long term, this novel approach ducks the real problem: the cost of college is rising faster than earnings of graduates. No financial scheme — no matter how innovative — can overcome the ultimate reality that this is not an economically sustainable long-term trend.

Andrew Norton notes that Australia already has a similar plan in place.