It would be nice if a proposal to solve the higher education student debt crisis would be based on something other than a fantasy that perverse incentives will not produce perverse results.
But that is the case with “Pay It Forward, Pay It Back,” now on the table in Oregon and getting an energetic sales pitch throughout the country.
The pitch is that it will relieve students of the crushing burden of debt that many of them receive along with their diplomas, by letting them go to college without paying any tuition at the time, and then paying it back with 3 percent of their adjusted gross income over 24 years. Some versions of the still-developing plan call for the payback to start at age 25, when most graduates will presumably be established in their working lives.
It sounds both simple and seductive. No financial pressure on the student or on mom and dad during the college years, allowing the kid to focus on getting a world-class education without the distraction of booze, parties … uh, I mean, slaving away at a part-time job.
Then, a graduate who takes a job at $30,000 a year would have to make an annual payment of just $900. As some of the proposal’s backers note, that’s less than most of them spend on their phone bill.
According to the math presented to various media outlets, an average former student’s income would grow to the point where he or she would be paying about $2,000 by the 20th year, at which point the net cost of about $32,000 in tuition would be paid off. Over the final four years they would pay about another $7,400, which would cover financing costs and also help to build the trust fund for the coming generations of students.
Simple, right? Sure – as long as all of those unique and special human beings conform to the expected averages so that all the mathematical projections hold.
But not so simple in reality. As a few spoilsports have pointed out, there are some gaping holes in the assumptions behind the plan.
First, it assumes that some graduates will make a lot of money, and that their payments will make up for the deficits created by those who don’t make much.
And that is where the perverse incentive aspect comes in. A highly motivated, highly intelligent college-bound student with prospects for a lucrative career won’t have much trouble doing the math. Option 1: Take out a $32,000 loan, pay it off over the next five to 10 years and be free of student debt. Option 2: Go to college for “free” and then, when you’re making $500,000 a year within a decade or less, send $15,000 a year to the state for another decade and a half, finally breaking free of your college costs when you’re about to turn 50. Let’s see – $32,000 vs. $210,000 or more. Not terribly difficult to figure out, even for a middle-schooler.
Second, it is hilarious to hear government types backing a plan that would require an equal percentage of gross income from everybody, rich to poor. Gee, it sounds a lot like a flat tax. And you don’t need me to remind you of the politically correct view of that. Sure, with a 15 percent flat tax, a millionaire would pay $150,000 and somebody making $30,000 would pay just $4,500. But you would hear the screams from sea to shining sea that the millionaire still wasn’t paying his or her “fair share.” You hear them even though the rich pay a much higher percentage of their income in taxes than the poor.
You can bet that if a program like this gains a foothold, the 3 percent-for-everybody piece of it will last maybe five years. After that, those who are already paying a lot more will be told that since they are “more fortunate,” they will have to pay even more.
Backers of the proposal are already speaking admiringly of Australia, which they say has a similar program, except that “bankers” have to pay a higher percentage than “teachers.”
This is another obvious incentive for adverse selection, because anybody with big ambitions will also be smart enough not to get sucked into a deal that would require them to pay five to 10 times or more than the actual cost of their education.
And that leads to another hole – a financial hole for taxpayers. The proposal estimates that it will cost Oregon about $9 billion in “transitional” costs to fund the program until the money from graduates reaches a level to make it self-sustaining. And if it doesn’t work as promised? You know who will be on the hook for that.
The only reassuring element of it all is that the Oregon state Legislature has created a study committee to come up with a pilot program. And in general, a study committee is a good way to delay or outright kill a proposal.
Taylor Armerding is an independent columnist. Contact him at email@example.com.