Sunday, February 05, 2012


Learn Now, Pay Later

You know how a song can get stuck in your head, and you can’t get it out?  That’s where I am with the idea floated in California to have students learn now and pay later.

As I understand it, the idea is that students will be advanced the cost of tuition, fees, room, living expenses, and books.  In return, the students will be “taxed” five percent of their post-graduation income for twenty years.  It’s being sold as a win-win for students and universities.  The students will benefit because the tax is based on income, so if you graduate into a recession, you aren’t saddled with high fixed payments.  The university benefits because it essentially declares independence from the legislature, which has a history of fickle support.

I like the spirit of the idea.  It’s innovative, certainly, and it addresses some real issues.  But I don’t buy it, at least in its present form.

First, the obvious: if the students don’t pay now, but the faculty and staff don’t want to wait twenty years to get paid, what bridges the gap?  In the absence of tuition income, how, exactly, does the university meet its payroll and other expenses?  If the answer is “other financial aid,” then I’m not sure how this amounts to declaring independence from the whims of the legislature.  

And that assumes that everyone gets full aid, which simply isn’t true.  Many students only get partial aid -- with the rest coming from the student and/or the student’s family -- and some pay their own way entirely.  In those cases, the temporal gap between the service and the tax has to be filled by something.  I just don’t expect that asking the faculty to wait twenty -- actually twenty-four -- years for their money will fly.

Second, shifting the entire cost to students lets the state off the hook.  That would be fine, at least in theory, if that meant that the university could govern itself as a private institution.  But I have no illusions of that.  As any exhausted administrator can tell you, the past few decades have involved a pincer movement of reduced funding with increased unfunded mandates.  Just because the state is off the hook for funding -- although I honestly don’t see how that would work, but just for the sake of the argument -- doesn’t mean that it’ll stop trying to get something for nothing.

Third, what’s to stop the percentage of the tax from changing?  Tuition increases that hit right now at least generate some painful awareness.  But telling an eighteen year old that she’ll pay more when she’s thirty-five is unlikely to generate meaningful cost discipline.  If anything, the history of consumer credit in America suggests that people spend more when the moment of payment is separated temporally from the purchase decision.  No payments for 90 days!

Fourth, new graduates’ salaries are notoriously subject to the whims of the economic cycle.  Replacing (purported) independence from the whims of the legislature with severe dependence on the whims of the business cycle doesn’t promise much stability.  At least when there’s a significant subvention by the legislature, it’s possible to spend counter-cyclically.  But good luck with long-term financial commitments -- like, say, tenure -- in years when new grads’ underemployment rates are unusually high.  

Fifth, there’s non-compliance.  How would this work with international students?  What about dropouts?  Transfers?  Scholarship recipients?  (Why apply for scholarships if you still have to pay the same tax rate eventually anyway?)  You’d have to build in enough slack to account for unemployment, incarceration, untimely deaths, graduate school, military service, illness, and folks who drop out of the labor force to have kids.  TW is a stay-at-home Mom.  If she were charged five percent of her income, would that mean she wouldn’t be charged at all?  Or am I suddenly on the hook?

And that’s before we get into the shenanigans that people already pull to minimize their taxable income.  The people who make a lot of money -- cough Mitt Romney cough -- are alarmingly good at that.  Charging five percent of “income” means both defining and verifying “income.”  The administrative requirements for this would make the FAFSA look like child’s play.

Finally, there’s the sheer heterogeneity of students.  What about those who live off-campus?  Who attend part-time?  Who drop out?  Who change majors and stick around longer than four years?  

Like so many policy ideas from high achievers, it assumes that everyone is a high achiever.  If everyone started at 18 and graduated at 22, then went straight to well-paying work and stayed there, it could almost start to make a lick of sense.  But here on Earth, it’s a non-starter.  A fascinating, well-intended non-starter, but a non-starter.

Years ago, in pre-internet days, I read that in Australia* all student loans were made by the government directly. The rate was set at a bit more than government bonds paid, but not much more. Upon graduation you paid a surtax on your income tax until the loan was paid off. There were provisions for people with no income, leaving the country, and so forth, but all I remember is that there were provisions, not what they were.

*That's how I remember it, but I may have got the location wrong. Old age, memory, and so on…
As I read the proposal from the group, it only applied to tuition and fees, not room and board.

Further, I thought their economic analysis looked at many things you listed and some you did not (like how much incoming tuition goes right back out as financial aid). For example, it would pick up again for your wife if she went back to work, since I think it applies to 20 working years. I think the biggest weakness is if the clock starts when you are earning squat at a grad RA and post doc.

The biggest trick is making the contract enforceable overseas, but in principle it should still apply even in a tax haven nation ... because it is not a tax. Best of all, it puts the U of C system way out in front of the "value added" crowd, since they only stay ahead of inflation if their grads do well.

There's been some articles in the past three or four years about the long-term outcomes of the experiment, but I can't seem to find it. I remember it didn't work out well; I want to say very high income people disliked that they were paying for years on end.

I thought that the way to improve on this is to make the 1% (5%? .4%) pre-tax income. It would a) increase the incentives to participate, and b) help address some of the income hiding issues.
Hi from Australia.

Yes, Anonymous is right, domestic undergraduate students have their tuition covered entirely by the government here. A portion of that we will have to pay back once we earn over a certain amount (government kicks in the rest). The system is called HECS (Higher Education Contributions Scheme):
this is a really bad idea.

first, engineers will see that it may be much more cost effective to go outside of the state. if it's a choice of Cal for 5% of my next 20 years pay, or UNLV for $50k total, as an engineer, i'll pay the $50k. that leaves the generally lower earning liberal arts grads as the ones who sign up, and the college's ROI will be much less.

second, what happens if a student dies? money gone. 4-5% of the population dies between the ages of 22-42.

third, what happens if a student moves overseas? how do you collect? how do you mitigate risk of foreign students coming over for a free education, and then just going home and skipping the bill?

fourth, what about stay-at-home mothers? my wife worked for 5 years, and then came home. will be home for at least another 5 years (could be forever. who knows?). that's at least 5 years out of the billable salary. what's to stop someone from getting a free education, and then just staying at home to raise their kids?

way too many "what-ifs" to try something like this.
Since this plan seems at least to be functional in Australia (if not idea; but then, what's ever ideal?) it would be instructive to hear from someone familiar with the details. For example, of the students who matriculate there, what percentage graduates? Do non-graduaters also have to pay? What percentage matriculate in the first place (i.e. what proportion of the relevant age group has to be accomodated by this system?) Over time, does this system fully support the institutions of higher ed, or are other income sources needed?
In answer to jas:

first - the system can only work if it's done on a national basis. I know the US is odd about doing things nationally, but that's how systems like this work in other countries, so that engineering student would have the same financial choice wherever he or she studied.

second - I've never heard this raised anywhere as a problem before, it doesn't seem to be a major problem. Maybe 4-5% of the population does die before the age of 42, but I bet the % is lower among the college-educated, so maybe that's why it doesn't seem to be an issue.

third - home students moving abroad after graduation is potentially a problem, but isn't the same true now for those who might decide to stop paying their college loans? My understanding is that fewer Americans move abroad than is true for most countries, so I doubt it'll be a problem. And non-US students wouldn't be eligible for this scheme in the first place, they'd have to pay fees upfront as now.

fourth - stay-at-home mothers (or fathers) wouldn't be affected, and neither would people who became unemployed, or took jobs with income below a set threshold. The tax doesn't kick in until salary goes above a certain point.
I like the concept, but the whole thing seems overly complex to me. If the goal is to advance college costs to students, why not simply give them loans that they must pay back over a reasonable period of time. If we still like the concept of linking amount of payback to income, then why not simply limit the maximum amount of repayments to a fraction of the former students' income? This would minimize the concern over 'gaming' income. No matter how much or little a person pays in any one year, the amount of the overall loan is only reduced by those payments.
This idea would probably fail based on administrative overhead alone. In order to have grads pay 5% of their incomes over 20 years, these grads would have to have their incomes tracked for those 20 years. Given the administrative burden already in place on schools, I can't see this making much sense. This is before talking about grads going overseas, being paid under the table, definitions of "income", etc.
in reply,

- would never happen. don't want it to happen.

- true. but a loss is a loss. where would that money come from?

- good point, but the difference is that today's problem is a problem for the banks, not for the U or the state. a bank can have a presence in many countries, and can still track you down. a state has a very defined jurisdiction.

- my point exactly. someone could get the education, and then never pay it back by never getting a job. again, where will the U (or state) get the money?

people will game the system. they always do. get your money now.
Another Australian here. More info about the HECS scheme here
I can't really give info about numbers off the top of my head, but basically the HECS scheme is available to all Australian citizens (and permanent residents and New Zealanders with some different conditions). This is regardless of income. There are discounts for upfront or early payments, which does favour people in a position to pay now. There is a capped amount of study it will cover (I think equivalent to 7 years full time study) over your lifetime. HECS is determined by unit enrolment, so if you don't graduate you can still have a HECS debt.

Higher education institutions in Australia are reliant on other sources of funding (and increasingly so, as government contributions are becoming a lower percentage of institutional budgets). That doesn't mean they are independent from government, though.
The problem to me is this sort of reminds me of how a mortgage in other places (Australia maybe? ha) is typically 15 years. Only in America do we have 30 and even 40 year mortgages. So folks couldn't afford the 15 year because the cost had gotten so high, so now it's 30 years. I'm not sure that is the best way to go forward. I'd much rather every single person pay an extra 3% in taxes that goes towards education. But then I seem to be the exception to the general population in that I would like to pay higher taxes for better services for those who need it and for better education.
Eli first heard this in 1962 from the then president of CCNY who told us that he did not want us to pay tuition, but he did want us to pay a surtax later in life (CCNY was then free, zero, zilch and it payed NYC great benefits) Its been around
It occurs to me that a lot depends on whether and to what extent the students have some skin in the game long before they have to start paying back. If the college education is basically free until you start earning, and low-cost if you're not earning a lot, then the skin has to be in the form of "did you bust your butt studying hard in high school in order to get here?" Here in the US we are uncomfortable with applying that metric (and it doesn't have to mean that you achieved high grades in scores or grades in HS, just that you applied visible effort).
Or is there another indicator that we could (and would be willing to) use to achieve that result?
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