Posts published on July 29, 2013

College For Free In Oregon? Not Really

by Dr. Watson Scott Swail, President & CEO, Educational Policy Institute

A few weeks ago, InsideHigherEd.com reported about the Oregon’s proposal to eliminate tuition fees at public colleges and universities. That statement, in isolation, isn’t exactly factual. Nothing is for free, is it? Or, at least, nothing good is generally for free. And the Oregon plan is not remotely close to free.

What Oregon plans to do, and only plans at this point, is to pilot what essentially is an income-contingent loan program. Students attending public colleges and universities in the state would not pay tuition costs during college. Rather, they would pay a relatively nominal percentage of their annual income for 24 years after graduation.

The state is looking at this because they, like every other state, understand that the current system of higher education finance—both to institutions and individuals—is untenable. There is simply not enough funding to properly support colleges, nor is there enough private (e.g., parental and student) funds to prime the pump.

Other countries, most notably Australia, have used income continent repayment plans, although Australia’s system has changed considerably over the years. The basic premise is sound: set repayment on what a person can afford to pay over a period of time. In theory, this negates affordability issues at the front end, which are attributed to reducing access and equity in our higher education system.

In Oregon, graduates from four-year institutions would pay 3 percent of their income for 24 years while those from two-year institutions would pay 1.5 percent. Seems simple enough, right?

The devil is in the details, and ICLs are tricky endeavors because of so many caveats. Critical questions include:

• What do you do with dropouts?
• What about the typically more expensive costs associated with going to college, including room, board and books?
• What about students who leave the state or the country? How do you “tax” them?
• What do you do about students who fail to pay (it happens in Australia).
• What do you do about part-time workers who fall below the repayment table?
• How much of lost tuition do you lose to people who die? (It is a real issue)
• Perhaps most importantly, how does the state ramp up a program when there would conceivably not be any tuition revenue until the first cohort of students is in the workforce? And also paying the smallest portion based on their lowest income?

I will bypass these questions in this Swail Letter to focus on the simple personal costs of the Oregon ICL. Below I have created a series of tables that illustrate a plausible extrapolation of salary, inflation, and repayments. This is simple math stuff that someone with Algebra I can easily decipher. However, the problem is that most ICL calculations fail to adjust for inflation. This is critical to understanding the real cost of a future program and it amazes me how many analysts fail to do this.

The table provides three scenarios: a starting income of $25,000, $40,000, and $50,000. I peg inflation at 3 percent per year, which is typical over a long period of time, while also pegging annual salary increases at two percent (which is probably conservative, but this is a difficult one to peg, for sure), for a total of five percent.

In the InsideHigherEd.com article, it suggests that a student who makes $800,000 over the 24-year period would pay back $24,000, compared to a student who makes $2 million would pay back $80,000. These are poor calculations for several reasons. First, I can’t imagine, in most cases, where any graduate would make only $800,000 over that time period. Possible, to be sure. Probably, not really. My table below, which starts at $25,000/per year and goes up conservatively, still earns over $1 million. As well, the calculations, including mine, I must add, do not consider that the greatest earning years are typically in the last quarter of life, not steady increases over time. But that becomes a big analytical assumption for another time, hopefully under contract. Remember, nothing great is free. Nor is this!

But even in the $25k scenario, the payback would be $33k at a four-year institution and $17k at a two-year institution. But this is before we adjust for inflation. Once taken into account, the cost drops dramatically to $23k and $12k (in today’s dollars), respectively for four- and two-year institutions. That’s a bargain no matter how one counts it. I know I’ll be paying $40,000 for in-state tuition for my sons in Virginia, so it is clearly a bargain.

If we skip to the $50k scenario, where over 24 years the graduate earns $2.2 million ($1.5 million in today’s dollars), we see a repayment of $67k and $33k, respectively for four- and two-year graduates. After adjusting for inflation, these come to represent $46k and $23k in today’s dollars. Still a huge bargain, especially given ability to pay.

From an affordability perspective, an ICL like this would support affordability and equity agendas; not distract from them. The article quotes Sara Goldrick-Rab of the University of Wisconsin as saying that the Oregon plan places the burden of paying for college directly on the backs of students, rather than parents and others. Shouldn’t that be where the burden lay? There is such a misperception in America that parents should be paying this bill, even though the student is the ultimate benefit of the degree and career outcome. In the next quarter century, we are going to be inundated with parents who are working until they are OVER 75; who have divested their retirement accounts (if they even had them to begin with) to pay for their children’s college. This will be a financial epidemic that is going to put HUGE strains on the social welfare safety net of every state and the nation at a whole.

The burden of access should be on society. The burden of repayment should rest jointly on society and the recipient.

Still, the challenge comes with cost of attendance. The Oregon plan only covers tuition, which typically is about 40 percent of the cost of attendance for residential students. Of course, this differs for commuter students, but not by as much as some might think. Even for commuter students, their cost of attendance would be close to the tuition mark.

Oregon is looking at the ICL because they understand there is a problem. Something has to change. The ICL may or may not be the answer, but at least Oregon is asking, so I’ll give them credit for it. This type of progressive socialism (and yes, when we have the state subsidize higher education, it IS socialism, ladies and gentlemen) is needed. Our higher education system will only work if we have an appropriate shared responsibility between the taxpayer and the student/family. Where that balance lay is beyond my pay grade, but it clearly isn’t where it needs to be given that the higher education institutions keep overspending, placing even more burden on students and parents.