Benjamin Studebaker

In the state of Oregon a new mechanism for funding university studies has been proposed. The scheme is called “Pay It Forward“. The idea is that instead of charging students tuition to go to universities, the state will fund their education and then extract payment after the degree is finished as a percentage of their income. For a student with a bachelor’s degree, the expected repayment would be 3% of income for the following 20 years. This presents a very different alternative to the university funding system presently in force throughout the United States, so let’s dissect it. Would Pay It Forward make Oregon’s university system better than it presently is? Is it the ideal alternative, and if not, in what respects does it differ from that ideal?

Regular readers may remember my point of divergence with Massachusetts Senator Elizabeth Warren’s plan to drastically reduce interest rates on student loans. I pointed out that keeping interest rates low only serves to further subsidize increases in tuition costs. It provides a short-term solution for next year’s students, but in the long run, it only serves to inflate the college bubble further.

The Pay It Forward scheme makes an important change to that system. Instead of college costs being determined by the amount of loans, subsidies, scholarships, parent money, and other resources available to students (which, due to our infatuation with sending absolutely everyone to college has proven to increase more or less continuously), costs will instead be limited by wage growth. If universities are entirely funded by 3% of income for graduates, university costs can only increase as fast as those wages increase.

On a national level, that would seem to index the rate at which college costs increase to the rate of inflation. That would be tremendously positive–unfortunately, Pay It Forward is not a national program. We might expect to see Oregon’s wages increase at a faster rate than the nation’s as a whole as a result, reducing its competitiveness. This assumes however that the 3% cost is larger than the tuition share paid. Part of the point of Pay It Forward is that the majority of students are expected to pay less than current tuition, with students who do exceptionally well making up for the rest. This would likely lead to increases in wages for workers at the top of the wage scale, but wages further down the scale would not rise. I hesitate to say that wages for most graduates would fall, however–though the debt burden on those graduates would be replaced with the smaller 3% tax, downward nominal wage rigidity (the tendency for wages to not fall even when there are economic reasons for them to do so) makes any outright drop in wages unlikely–in Spain, for instance, despite years of economic depression, wages remain very reluctant to fall. In sum, an application of this system exclusively in Oregon would probably only increase wage inequality a little bit in that state.

All of this sounds reasonably positive, but then I read this part:

Will [Pay it Forward] replace state funding for higher education?

No. It’s critical that the state continues to invest in higher education, and even with Pay It Forward in place, the level of funding for higher education in Oregon needs to increase. Oregon has set itself ambitious goals for higher education and unless the state increases its investment in its university system, these goals will never be met.

If the scheme doesn’t replace current mechanisms for state funding, it may struggle to reduce increases in university costs. While the cost for students would be fixed (unless the state were to decide to raise the tax further), the state could end up still seeing ever-higher university costs. Eventually I would expect those costs to be capped by an unwillingness on the part of the public to pay higher tax rates in order to sustain their continual rise, but this bit still opens the door to further cost increases down the road.

Nonetheless, I think the scheme as a whole presents a better model for restraining the endless upward march of university costs than what we’re currently working with, particularly if the tax rates were adjusted so as to cover the entirety of the cost and really drive home that link between wage growth and growth in college costs.

That said, there are a couple other issues with it:

1. Flat tax rates are regressive.
2. Pay It Forward still misidentifies the primary beneficiary of a college education.

The first is a rather pithy thing for me to pick on, considering that a 3% tax on all students with bachelors degrees is much more progressive than a fixed amount all students pay in tuition. Nonetheless it must be said that if the rate itself were higher on wealthier brackets, rich students would even more effectively subsidize the costs of those who benefit less from their university educations.

The second is I think much more important, because it is indicative of a widespread error in our thinking as a society about the role colleges and universities play. We do not send people to universities for their own good. They certainly benefit from going there, both socially and economically, but this is in no small part because we deliberately made it that way. We as a society decided to create incentives to encourage people to go to universities. We went out of our way to make them fun, exciting places where you can meet new people, have new experiences, and increase your earnings later in life. We didn’t do this because we want the 20-something university students to be happy. We certainly care about their happiness, sure, but that was never the point.

The point was that young people would use the skills, knowledge, and relationships they forge at the universities to make our society better. They would invent labor-saving machines, or create marvelous entertainments, or life-saving medical advances, or what have you. We send people to universities to make society a better place for everyone to live in, not merely to help them line their pockets and have a good time. All people, regardless of whether or not they went to universities for any length of time, benefit from the technology, art, and culture that university graduates create.

Books, movies, computers, video games, electricity, indoor plumbing, buildings that don’t collapse, everything good and civilized requires the labor of highly educated people. This is not to say that we don’t need low skill or unskilled laborers as well–we very much do–but we should acknowledge that low skill and unskilled laborers benefit from the existence of universities. Everyone is better off because some of us have spent and are spending inordinate amounts of time learning things.

For this reason, a truly just system of paying the costs of university education would make the university system into a public good and separate entirely the cost from the individual students. No one should pay tuition or pay a 3% tax to make up for not having paid tuition. The state should simply eliminate tuition and raise taxes as needed to produce as many college educated workers as the economy demands. If a flat 3% tax on graduates can replace the cost of tuition, a small increase in our income taxes, assigned very progressively, would do the job just as easily, without charging students for helping us out.

As a bonus, income would be entirely divorced from determining who gets advanced education and who does not. We could simply determine the economy’s need for various kinds of education, set quotas for the various majors and degrees, and give places to those most able to learn the skills needed.

But to have that kind of society, we need to own up to the advantages society as a whole reaps from education and stop charging students to engage in activities that benefit all of us.