Thursday, July 11, 2013

Oregon College Tuition Plan

Currently most Brasilian schools are on winter break, my kid's included, so we are doing as many Brasilians do and having a short vacation - thus the lack of blogging.

Nevertheless, I have wanted to blog about the proposed college tuition plan for a while but spotty internet has held me back.  The internet is still spotty but fortunately Betsy Hammond in The Oregonian (can I still call it that?) has written a brilliant article that says most of what I was going to write.  Here is a rather large excerpt (so go to the O site and read it all so they don't get mad at me):
Such a plan has legions of problems, however, said Mark Kantrowitz, a widely cited financial aid expert and senior vice president of the group of financial aid websites. That helps explain why the approach, though studied many times, isn't being used anywhere in the United States.
Among the catches he cited:
  • Many students would still end up owing big loans -- plus the promised percentage of their income. Only tuition and fees would be free, and many students need loans to cover the other costs of college. According to Di Saunders, communications director for Oregon's university system, the typical four-year cost for an in-state undergraduate is about $87,000 -- $31,000 for tuition and fees and $56,000 for rent, food and other expenses. "You'll end up with the hit to the income and you still have student loans," he said. "It's not really going to solve anything." 
  • Twenty-four years is a long time to burden a student with college costs, even if payments are only about $2,000 a year during the final 12 years of the contract. 
  • Asking students to pay 3 percent of their income, even for that long, would be unlikely to cover the state's costs to operate universities for free. Students would likely be asked to pay a higher percentage or the system would go broke, Kantrowitz said. 
  • Collecting money from former students who move out of state or out of the country would be tricky at best. Oregon doesn't have the power to compel other states or the Internal Revenue Service to tell it how much individuals outside Oregon earn. And other states would probably try to regulate the repayments as loans, which could run afoul of usury laws. 
Saunders said she sees another, bigger challenge: To keep universities operating, Oregon would have to come up with a lot of money to replace the lost tuition and fees until enough graduates have started making repayments -- perhaps for as long as 10 years. "The state would have to pay a lot more in general fund support until the pool is built up," she said. Given that Oregon struggles to pay 30 percent of the cost now, relying on students to pay 70 percent, "that might be too heavy a lift."
I would also make one larger point. This scheme is not a lot different than the current system of financial aid. We already charge very different prices to students based on financial background through the use of grants, subsidized loans and so on.

 The current system of student loans allows delayed repayment, deferment in times of unemployment and you can even get your loans stretched out over as much as 25 years. yes there is explicit interest but the proposed repayment scheme still has to deal with the time cost of money and will have to collect enough to cover it. To me it is hard to see this anything different than internalizing the student loan market.

The main difference is that the current system means tests based on current income status of the family (or the individual for non-traditional students) this means tests on the ex-post labor market outcome of the individuals.

This creates an interesting moral hazard problem - borrowers (which is what I will call them) will be more apt to choose careers that pay less well. It also creates an adverse selection problem - those that seek such loans will be disproportionately those whose interests are in areas in which the labor market has set the wages lower. This may be good for the spirit of those that choose arts, literature and the like - and society might be better for it - but it will also cost more and the system has to be ready to defray those extra costs.

Finally, I call the folks that would take advantage of this deal borrowers because this is functionally no different than a loan. It is a different kind of loan to be sure, but it is a loan just the same. Now the lender becomes the state of Oregon or the universities themselves - but the fact remains that students are borrowing for school. Which is why I have nothing agains to the plan and am willing to be convinced that it is a better system but I am not yet so convinced. It sounds pretty cool, but the nuts and bolts are less thrilling.


Dennis said...

.... I'm finding it really hard to believe any significant number of people will intentionally choose a lower-paying job to avoid repayment. Do you have any evidence for that?

It seems more plausible to claim that people will choose a major they actually care about, rather than one that makes money, under this loan system. That's a different motivation than choosing a lower-paying job.

In any case, I've been told by someone who worked on the legislation that the way it's being reported is completely wrong. All that passed was legislation that directed the Oregon government to look into the feasibility of this. And when that happens, you can bet all of the problems being listed here and elsewhere will come up.

Allan said...

It seems like one of the things this would do is incentivize schools to push people towards more lucrative majors so they can get repaid more.

I wonder how this would affect charitable giving among alumni.

Tuition, room & board, and supplies, etc could all get included - the system is in an outline format right now. I don't see why someone would switch to this system if they had to still take out loans.

Patrick Emerson said...


That's what I meant when I said society could be better for students choosing such majors. Not making a judgement about that bit just an actuarial statement.


Good point about schools and their own moral hazard problem...

And, to be clear once again, I am not against the plan just not yet convinced.