Monday, July 08, 2013


No, Don’t Pay It Forward

Apparently, Oregon is considering a plan to allow students at public colleges and universities to skip tuition and fees upfront, in return for agreeing to be taxed a set percentage of their income for the first twenty years after they leave college.  It’s known as “Pay It Forward.”

It’s an audacious, innovative, terrible idea.  I love the spirit, but it’s a train wreck waiting to happen.

A similar idea came up in California last year.  At the time, I raised several objections.  (You can read the full version here.)  The highlights:

- Obviously, in the interim between now and payback time, the state would have to pony up far more money than it currently does.  Unless I misread the politics of it, that isn’t likely.

- The political impulse, over time, would be to phase out the state subsidy altogether, and to shift the entire cost burden to students.  (Admittedly, this objection is vulnerable to “as opposed to...?”)

- Higher education would be subjected even more strongly than it already is to the vagaries of economic cycles.  Since recessions hit the young hardest, and this tax would mostly hit people from their early twenties to their early forties, the hit to college budgets in recessions would be magnified.

- Students are stubbornly heterogeneous.  (The positive term for that is “diverse.”)  How would this work for part-time students?   What about students who go back to college at age thirty?  What about students who go on to graduate school and don’t make meaningful money for eight or ten years out?  Transfer students?  Students who repeat courses?

- Scholarships could become irrelevant.  Why a state would want to replace privately donated money with its own is beyond me, but there it is.

- If you think financial aid is administratively complex now, just imagine verifying the income of graduates ten years out who have every incentive to lie.  In the absence of some sort of unit record system, good luck with that.

Since then, I’ve come up with a few more, with help from wise and worldly readers.

- High-earning students would resent what they perceived as overpayment.  (I’m told that this was the experience in Australia, which actually tried something like this.) Since high earning tends to correspond to high influence, I’d expect to see disgruntled high earners use their clout to minimize their obligations.  To the extent that they succeed, they hollow out the cross-subsidy that would have paid for all those grad students and stay-at-home parents.

- Like socialism in one country, a plan like this in one state is doomed.  Students who expect not to make much -- say, the ones who expect to go on to grad school -- would flock to Oregon.  Students who expect to make a lot of money -- the petroleum engineering and computer science majors -- would flee Oregon for more hospitable climes.  That kind of adverse selection would wreak havoc on the cross-subsidy model.

- From an institutional perspective -- come on, you knew that was coming -- separating budgets from performance by five to ten years can’t help but create weird incentives.  Community colleges would get a particularly raw deal, since its high-achieving students tend to transfer, and therefore to make relatively little for the first couple of years out.  (The typical college junior isn’t exactly rolling in it.)  The plan seems to be structured on the assumption that students are either community college grads or four year grads; it isn’t obvious how it would handle students who are both.  When you have a student body with lots of thirty-five year olds, part-time students, and students with developmental and similar needs, the model won’t fit.

- I really don’t think the state has thought through what it would mean to lose Federal financial aid.  Right now, much of what we call “tuition” actually comes indirectly from Federal coffers, whether as Pell grants, work-study awards, or subsidized loans.  That’s money that the state doesn’t have to provide.  There’s a case to be made that as states have cut back their support, they have effectively shifted the burden of paying for higher ed from states to the Feds.  Financial aid is the new state aid.  To the extent that Oregon displaces Federal aid with its own money, it gives its own taxpayers a uniquely raw deal.  Residents of Oregon would still pay Federal taxes, but they’d lose this particular Federal benefit.  As a non-Oregonian, that’s not my problem, but I can see Oregon’s voters getting cranky once they figure it out.

I understand the first-blush appeal of the idea.  But we could get nearly all of the benefit of this system at far lower cost simply by making income-based repayment the default mode for student loans.  There would still be room for scholarships, institutional incentives would be closer to real time, the state wouldn’t lose Federal support, and we wouldn’t have to worry so much about students who transfer (or, for that matter, about students who strike it rich).  If Oregon wants to reduce sticker shock -- a worthy goal -- it should simply increase its subsidies to public higher ed.  It can work; in my own state, for example, we’ve agreed to freeze tuition and fees for next year in exchange for higher state support.  Get it in writing, and it’s not that hard.

Wise and worldly readers, what do you think?  Am I being unjustly harsh, or is this actually the slow-motion disaster it appears to be?

We DO have a system like this in Australia, at least in broad outline. It's called the Higher Education Contribution Scheme, or HECS. There are a few wrinkles though. It's a progressive tax, so if you don't earn much, you don't pay it back, or pay it back at a lower rate. Perhaps most importantly, our education system is overwhelmingly public-funded, so the amounts to be paid back aren't punishingly high.

It seems to work pretty well in my opinion, but we have a very different basic setup.
Another possible unintended consequence: this could ratchet up the mommy (or perhaps, in this rising generation, parent) wars even further. Student loan repayment typically takes place during peak childbearing years. If working outside the home means paying for day care *and* paying back tuition, there's even less incentive to do so (and that, of course, can leave the parent at home especially vulnerable in case of death of or divorce from the other parent). Of course, that's a potential problem with a student loan-based system, too. I suppose you could work from household rather than individual income for couples (by some definition; of course we then get quickly get into the question of who counts as a couple in the eyes of the law), but you'd still have a fight over who was being incentivized to do what, and whether that was fair to those who made other choices.

And yes, this does seem like another way to avoid discussing state reinvestment in higher ed.
I am a native Oregonian, graduated from Oregon State University with a reasonably small amount of loans (thanks mom and dad!) and am currently enrolled in a Master's program at OSU. This news took over my Facebook feed the day it was passed. I've also got some friends who work in or with the Oregon Legislature, and they were alllllll about this.

Yet I share the criticisms made here, especially Cassandra's. I just don't see how this, plus institutional boards doesn't lead to near-total collapse of true state funding for higher ed. (Until this legislative session, Oregon had one Board of Higher Ed for all seven four-year schools, and now the schools, within the next few years, can have their own governing boards. Nike and Phil Knight are in Oregon, and UO pushed this legisation. You figure it out.)

I think OSU, UO and maybe PSU get 10% or thereabouts of their funding from the state as is. Recent moves will only bring that number down. Oregon used to have a decently good public higher ed system. It's going away, and this, despite being pushed by the Oregon Working Families Party, is part of it.
There aren't many details in the NY Times article, but you can hear an outline of the proposal by watching the last part of the presentation on YouTube (linked by the NY Times).

It only covers tuition and fees. You might still need to get a loan to cover books and living expenses (and then blow some of it on a stereo system or phone bills). I can see this as an excuse to drive State support for tuition even closer to zero than it already is.

BTW, what I found most remarkable was the state Treasurer's proposal that was outlined at the start of that part of the presentation. Bonding doesn't require taxes? You can pay off the bonds, grow the fund with investment, AND give grants to students? Sounds like magical thinking to me, so I'd recommend everyone in Oregon higher ed pay attention to that!
Sorry, I messed up the link to the last part of the presentation on YouTube (linked by the NY Times).

I think this could be a big problem with international students--ensuring compliance that they would pay would be a massive headache, and what happens if (say) the US and China go into war?

Universities would probably cut out international students all together. For purposes of a diverse student body and American soft power, that would be a problem.
This sounds like the Student Loan arrangement.

Don't pay up front, then pay off the loan over 25 years.
I'm in higher ed in Oregon and this is barely a blip on the radar screen. I don't think any of us think this will go beyond a small pilot program as the startup costs of a full fledged trial will sink it pretty quickly. No one here has seemed worried about this; maybe we should be.
" the state would have to pony up far more money than it currently does. "

I thought that this was just a clever scheme for making that happen. The rest is totally irrelevant.
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