Eric Kelderman’s recent column in the Chronicle of Higher Education article (subscription req’d) on Oregon’s Pay It Forward* debt-free degree plan uses selective and narrow reporting that does a disservice to readers, policymakers, and students looking for solutions to America’s crushing student debt problem.
Lower Start-up Costs
Kelderman starts by calling out the “estimated $9 billion start-up cost” for Pay It Forward (PIF). That does make for dramatic reading, but Kelderman neglects to mention (1) that figure represents the cost of incorporating all 85,000+ students in Pay It Forward at one time, and (2) Oregon’s legislation mandates no such scope. It calls for a pilot project – one still being designed – which might include just one state university and one community college, only one cohort of students at a time, or other variations — any of which would cost quite a bit less.
As for payment of those start-up costs, Kelderman writes that it would come from either “state debt or philanthropy” – a statement that is at once both too vague and too narrow. Some context would prove useful.
For example, in November 2014, Oregon voters will consider a proposed constitutional amendment to allow the Treasurer to issue bonds to create an “Opportunity Fund” for higher education. If passed, a portion of the proceeds of this bond issue could be dedicated to start-up costs for the pilot PIF program.
Two other viable ways to finance Pay It Forward start-up costs also go unmentioned by Kelderman: raising taxes, which Oregon voters have very recently shown a willingness to approve, and federal start-up funding, a proposal Oregon Senator Jeff Merkley introduced more than two weeks before the Chronicle published Kelderman’s article.
A Smarter Investment
But Kelderman’s chief criticism of Pay It Forward is this: college students who believe they will earn more than the average graduate won’t participate, because they would pay more in total under Pay It Forward than they would with loans. That would mean the Pay It Forward trust fund won’t benefit from their (larger) contributions, and so won’t be sufficient to pay for future cohorts of students.
Economists call this a problem of “adverse selection”. It’s appealing in its simplicity, but hardly the problem Kelderman makes it out to be, for two reasons.
First, he doesn’t account for existing adverse selection under the current loan-based system. High debt is a disincentive to apply to and attend college. It also makes it harder for students who want to teach, be a nurse, or social worker (to pick just three of many professions that pay high social dividends, but not high salaries) to afford a degree. Pay It Forward has the potential to generate a tremendous amount of educational opportunity and social equity that is lost with today’s debt-financed degrees.
Second, even among students who “know” that they’ll make a good salary after college (and I think many college students would find that a dubious assumption), Pay It Forward is more attractive than debt financing for one simple reason: it puts you in a stronger position from which to start life after college.
To understand why, you have to keep in mind that tuition is already at or above $10,000/year for one or more 4-year public universities in 21 different states.** Meanwhile, 80% of American households have less than $100,000 in annual household income. For the vast majority of students coming from those households, PIF is going to look like a much better deal than going into debt.
For a moment, put yourself in the shoes of someone who would seem very unlikely to use Pay It Forward: say, an ambitious lawyer- (or engineer- or entrepreneur-) to-be whose parents are well-off enough to have $50,000 in cash for you to use for college. You’ve been accepted at the University of Washington in Seattle, where tuition is about $12,000/year. Which of the following is your best option?:
a) Graduate debt-free (thanks to Pay It Forward), have $50K available to start your business or go to grad school — AND know that whether your start-up tanks or gets a big IPO…whether you have to string together internships or land in a big corporate law firm…you’ll still contribute just 3% of what you earn, no matter what.
b) Borrow the money for school and graduate in debt with the monthly payments to match. You’ll still have the $50K to start your business (hoping it’s a success) or go to grad school (hoping you get a good job afterward).
c) Graduate debt-free by spending the $50K from your parents, and try to put together the savings (or take out a loan!) for your business or grad school.
Kelderman says students who expect to earn more will attend private colleges and thus avoid Pay It Forward. But stop and think about that for a minute. As I’ve just illustrated above, even for students coming from families with means – or those who are likely to go on to earn a good salary – Pay It Forward still offers no debt and a better cash flow position than student loans. Doesn’t that make Pay It Forward far more attractive than debt financing — and not just for upper middle class, but also middle class, working class, and low-income students?
Of course, individual situations will vary, but therein lies the beauty and strength of Pay It Forward: it protects your options no matter your situation. Many of today’s college students instinctively “get” this key difference between Pay It Forward and student loans – even as many detractors fail to acknowledge it: Pay It Forward is actually a social insurance plan designed to protect you after you graduate: it gives students the freedom to choose a post-graduation path without being encumbered by debt.
Those who don’t need or want the insurance that Pay It Forward provides – probably students from families with over $100,000 in income – are likely to find their way into private colleges, which is already the case. But even for those students and their families, public universities are going to have a very different value proposition with (effectively) no upfront tuition costs.
A Closer Look at Higher Ed Expenses
Kelderman’s second main criticism is that Pay It Forward’s trust fund won’t be sufficient to cover long-run costs, because even while state fiscal support for higher education is falling, expenses are climbing (he asserts) at twice the rate of inflation. However, his figures cover just one year, from 2011 to 2012 – and that does not a trend make. Nor do national numbers tell the complete story about what’s happening in each state, where clearly it’s possible (even if politically difficult) for state policymakers and public higher education administrators to take steps to control costs.
At the University of Washington for example, the total cost of education per student was $16,310 in 1990-91, and $17,103 in 2011-12. (All figures are given in 2012 dollars.) That’s an increase above inflation of just 4.8% over a period of 21 years. At the state’s comprehensive universities, the total cost per student has actually declined 15% (from $11,929 to $10,128) during the same time period. Community college costs have increased nearly 20%, but that’s still less than a 1% increase per year.
Credit where it’s due: Kelderman is correct to say that state support for higher education is falling dramatically. But he fails to connect the dots: cuts to state higher education funding are exactly what are driving the tuition increases that lead to high student debt.
A New Political Calculus
Kelderman’s greatest overreach is his condemnation of Pay It Forward because “there is no guarantee that states would continue to subsidize public colleges at the same level for a quarter century.” Well, that’s true. But it’s also true of every public policy, unless the political will exists to keep it in place. And as it turns out, that is actually one of Pay It Forward’s strong suits.
Even as ‘just an idea’, Pay It Forward is already reshaping political dialogue. Students, families and policymakers – who have long understood that debt financing works well for big banks, but not for working families – now have a viable policy alternative to put on the table. That’s why, at last count, stakeholders in 14 different states are exploring Pay It Forward, from writing legislation to studying how the model might work for them.
Pay It Forward can actually create public policy mechanisms and help build political will to improve higher education funding and rein in tuition increases. For example, federal start-up funds could be made available only to states that maintain a minimum level of public funding for higher education.
The high demand for Pay It Forward could also increase political inclinations to maintain or even reduce tuition – because doing so reduces the necessary size of the PIF trust fund, and makes it possible for that fund to reach self-sufficiency more quickly. And as the number of people participating in and benefiting from Pay It Forward grows over time, so will political resistance to attempts to undermine it or higher education in general.
Disrupting the Status Quo
Pay It Forward is an alternative to the high-tuition/high-debt status quo. There are important details to be worked out and improvements to be made, which is normal for any public policy proposal. But Kelderman’s critique doesn’t offer a viable alternative to either Pay It Forward or to the current high-tuition/high-debt system. Hopefully, future discussions of Pay It Forward can be used as opportunities to create workable policy designs that help resolve our nation’s student debt problem, instead of prolonging it.
*If you’re just tuning in, here’s a quick summary of the Pay It Forward (PIF) proposal:
A student can attend a public university or college without paying upfront tuition fees. In exchange, the student agrees to contribute a small, fixed percentage of their post-education income for a fixed period of time. Their contributions, together with other Pay It Forward participants, are pooled in a trust fund that (once fully funded) enables future students to also attend college without paying upfront tuition fees.
In contrast to debt financing (i.e., student loans), PIF doesn’t involve repaying a specific amount plus compound interest. Rather, participants are guaranteed a manageable contribution, regardless of income (or income fluctuations). The specific terms would vary depending on the state. In Oregon, Pay It Forward supporters estimate students would contribute about .75% for each year of school – so graduates from a two-year community college would contribute 1.5% of their income, and a four-year college graduate, 3.0%, for 20 years. Those who attend but don’t graduate would contribute a pro-rated percentage of their incomes.
Oregon’s legislation passed unanimously and was signed by Gov. John Kitzhaber in late July. It directs the state’s Higher Education Coordination Commission to develop a Pay It Forward pilot project for consideration by the 2015 Legislature, and to develop a plan for a four-year tuition freeze.
**States with tuition above $10,000 at one or more of their public 4-year universities:
Arizona, California, Colorado, Connecticut, Delaware, Illinois, Massachusetts, Maryland, Maine, Michigan, Minnesota, New Hampshire, New Jersey, Ohio, Pennsylvania, Rhode Island, South Carolina, Texas, Virginia, Vermont, Washington.