All Commentary
Monday, August 19, 2013

Taxpayers Pay It Forward

The Latest Bad Idea for College Funding

If there’s one thing the State is unquestionably good at, it’s justifying its own existence.  Whenever you hear politicians touting the latest cutting-edge “solution” they’ve developed to a perceived problem, you can be sure that this is just one phase of a vicious and repetitive cycle. First, the State intervenes in a market in order to supposedly improve it. This intervention fails, making things worse than before, thereby justifying further intervention in order to fix the new problems that have been created.

This process is currently underway in my home state of Oregon, where the legislature is considering adopting a plan known as “Pay It Forward, Pay It Back” to finance college education at public, in-state schools. 

Under this plan, the state (meaning the taxpayers) would fully fund, up-front, the college education of any Oregon student who decides to attend a public, in-state school. In exchange, students would “pay back” 3 percent of their post-graduation income for the next 24 years. At no point will anyone bother to examine and compare the amount that was spent on a particular student and the amount that he repaid. If, after 24 years, you have only paid half of the amount that was originally “lent out” to you, don’t worry about it, you’re off the hook anyway. If, after 24 years, you’ve paid double the amount that was originally “lent out” to you, don’t expect a refund for the difference, either.

What seems so fascinating to people about the proposal is, in essence, why the program is doomed to fail. 

Under such a system, the costs of a service are not even remotely connected to what someone pays for the service. Such a scheme incentivizes all sorts of waste and irresponsible behavior. According to The Wall Street Journal, “The program's designers intend it to become self-sustaining,” with the money paid back by graduates going into a trust fund in order to finance the next year’s crop of students (similar to how Social Security is theoretically supposed to sustain itself).

In order for the program to become self-sufficient, the revenues would have to match (or exceed) the costs (plus interest, as the costs would be borne immediately, while the revenues would trickle in slowly over the course of the 24-year repayment term). The university system is already full of unclear subsidies and cost disparities; this program would confuse the basic cost-benefit analysis even further. An audit of the Oregon University System conducted by the Oregon secretary of state conceded that “across universities, the revenue from departments with surpluses is used to support departments that cannot cover their expenses.” While the website estimates that the cost per degree at the University of Oregon was $64,218 in 2011, the true total cost of an education for any individual student is virtually unknowable.


The Raw Deal

In terms of benefits, we all know that the amount of earning potential for recent graduates is far from equal. Certain majors generally tend to outearn other majors. According to its enrollment statistics, the top five majors at the University of Oregon in 2012 were pre-business administration, psychology, human physiology, biology, and business administration. According to the website StudentsReview, the 10-year average salary for psychology majors is about $75,000. Meanwhile, the 10-year average salary for biology majors is about $133,000.

Assuming this program does not become mandatory for all students, those who are going to end up earning the most money would have a strong incentive not to participate. These are the very students the program depends upon to become self-sustaining. Someone who intends to major in biology or any other high-paying field is likely capable of crunching the numbers and realizing that participating in this program essentially means subsidizing classmates who obtained degrees in less lucrative fields. 

Under this program, any student making an average salary over $100,000 for 24 years will end up “paying back” over $72,000 in tuition. Meanwhile, a student making an average salary of $45,000 over 24 years would pay back only $32,400. Currently, four years of resident tuition at the most expensive state school in Oregon is about $40,000 (other costs, such as food, room and board, and living expenses are not included in this program, and would still have to be provided by the student out-of-pocket). We end up with a situation where the most productive and successful students are potentially paying a lot more than their education may have cost, while the least productive and successful students are potentially paying a lot less. (Who said that college doesn’t prepare young people for life in the real world?) 

You don’t have to be an economics major to recognize that this is a raw deal. Traditional college financing is still going to be the better option: It establishes a maximum amount of money a student will owe, rather than an open-ended figure that could end up being much higher. Students might also flee Oregon entirely, seeking an educational environment where success and achievement are not punished.

At the same time, by lowering the total cost of degree programs less likely to lead to high-paying jobs, Oregon would essentially be subsidizing and encouraging more students to enter these fields. Before deciding whether to utilize this program, students would likely attempt a cost-benefit analysis by examining the earning potential of their field of study. Students in non-technical fields traditionally face higher unemployment and lower wages. For these students, the program potentially represents a great value, as the cost of paying back 3 percent over 24 years will likely be lower than the cost of financing college through traditional loans. At the same time, students who choose more technical STEM fields will do some calculations and realize that traditional loans will be the lowest-cost option. This will wildly distort the population of program participants in favor of lower-earning fields, which will make it that much more difficult for this program to sustain itself financially. It will also leave Oregon with an even greater surplus of students who spent four years in college, only to graduate and face high unemployment and low wages.

Given these perverse incentives, I consider it quite likely that the planners are wrong, and that this program will follow in the footsteps of every other “self-sufficient” government program—that is to say, it will not be self-sufficient at all. In that case, who is on the hook? Why, those suckers in Oregon who already pay the third-highest income taxes in the United States. Taxpayers are going to provide all of this money to prospective students up front. If the revenue from the future earnings falls short of expectations, then the same taxpayers will have to take a loss from this program. 

Up-front costs would become totally irrelevant to the average student, thus incentivizing universities to raise tuition and waste money on extravagant and unnecessary expenses (something universities are experts in already, as John Stossel has frequently reported). Students themselves will face incentives that encourage them to pursue degrees in fields with relatively low pay and high unemployment. Particularly successful students could easily end up paying three, five, or even 10 times the amount of their peers who received the exact same education. The entire program smacks of “from each according to his ability, to each according to his need.” Perhaps they should at least go for truth in advertising and call it “Taxpayers Pay It Forward, We’ll Let You Know What to Pay Back.”