Should Oregon fund college through equity?

Here is the latest proposal, which seems to stand a chance of actually happening:

This week, the Oregon Legislature approved a plan that could allow students to attend state colleges without paying tuition or taking out traditional loans. Instead, they would commit a small percentage of their future incomes to repaying the state; those who earn very little would pay very little.

I’m all for this as an experiment, but I’m not sure how effective it will be.  Here is one more detail:

The plan’s supporters have estimated that for it to work, the state would have to take about 3 percent of a former student’s earnings for 20 years, in the case of someone who earned a bachelor’s degree.

Twenty years is a long time and I fear the implied selection mechanism embedded in that time horizon.  At the margin I would expect this to attract people who don’t have a vivid mental image of the distant future.  Furthermore the terms of the program discriminate against those who expect high earnings or for that matter those who expect to finish.  In other words, the drop out rate of the marginal students here may be relatively high.  And what are the payback terms for dropouts?  Do they get off scot free?  Pay proportionately for what they finished?  Pay much much less to reflect their lower expected wages?  The six-year graduation rate at Oregon State is only about 61%.  This is not a small question.

Funding education through debt or through family-based crowd-sourcing may serve up a better mix of students.  By the way, this source says the repayment period is over 24 years, not 20.  Again, keep in mind that “the rate of return for the marginal student” is not the same as the “rate of return for the marginal student who would be attracted by these terms.”

And is this a better or worse deal for the median student at say Oregon State?  If most students take this offer, I fear that the university’s incentive to improve the quality of education will not stay intact at the margin.  I do understand there is a version of this plan where the tuition revenue simply comes from a state program rather than from the student, but more likely than not Oregon would end up with a “complex formula” which weakens the incentives of the institutions at the relevant margin.  (On the state side of the equation, there is an incentive to conserve on cash and make the marginal tuition “free,” rather than pay the same amount of cash to the school the student would have paid.)  Alternatively, if most students do not take this offer, one has to wonder what is wrong with it and adjust one’s estimate of the adverse selection problem accordingly.

Let’s assume, for the purposes of argument, that the 3% future “tax” won’t hurt labor supply at all.  How is this program so different from moving to the European model, where higher education is free or near-free and general taxes on the population are higher?  Yet the European systems of higher education are generally worse than those in America, so why should we be trying to copy them or move toward them?  If anything, they are trying to move closer to American models.

At the end of the day, I am willing to let Oregon make a likely mistake to find out how this works.  Go ahead guys, do it, we are all watching.

I thank several loyal MR readers for the pointer.


It's an experiment I would like to see tried. But I don't think the adverse selection effects are trivial. I have a little more information of my earning potential than a creditor – or at least about my interests (math, or art history?) and work ethic – and even that doesn't say much. At least if I take a debt, I'm more confident about my ability to earn more and don't want to commit my income which, presumably is expected to be relatively high.

I can only see this working if equity financing is the only tool used by most students. If both credit and equity markets for college education remain used, the latter will suffer from adverse selection as only those with a low expected future income will avail thereof. And those who are risk averse which, today, is also correlated with lower income...

I think equity makes more sense in crowdfunded models where specialized investors have more scope to find important information.

On the other hand, I think this has good distributional effects. While the current model saddles those who can't afford to pay for college which lots of debt, equity-financing at least only commits a proportional income.

It would be interesting to see if there was an "equity premium puzzle" in such markets to "bond" financing.

I would have taken the deal in a heartbeat over debt. I'd rather share my success a bit more widely than expected/hoped for than being saddled with debt if I am of the unlucky ones for whom the benefits of graduating fail to materialise.

NB: I would expect that calculus to be ever more relevant as, how did Cowen called it, variability in the college premium increases,,,

I'm skeptical that most 18-22 year olds are actually all that good at predicting their likely income/success level. If they were, then they would generally be taking on a reasonable amount of debt, and the student loan problems we have now would just be about too much tuition inflation and maybe some arms race things happening with everyone expecting a college degree.

This is an option, right? So, if you anticipate high earnings in the future, you would opt to borrow rather than participate in the 3% plan. What this may do is fund more English and Theartre arts majors.

Secondly, what is income? Is it earned income? If it is earned or W-2 income, then you might see wealthy people send their kids who will live off an inheritance, rather than W-2 income in the future, to Oregon.

I am in favor of all college students having rich parents so that they can go to college. That solves the problem.

Bill suggests: What this may do is fund more English and Theartre arts majors.

But doesn't it (ok, couldn't it) incentive the university to teach those English and Theatre arts majors how to make money?

*"incentivize," sorry!

What, by telling them to not major in English and theater arts?

You know, at first your comment made me laugh, but then I realized, "Of course, that's exactly what they would do."

And that would be good, wouldn't it?

There is no such incentive, because those deciding what to teach bear none of the cost (at least as far as I can tell from the article).

Or does it incentivize the university to make those English and Theatre arts courses impossibly hard, so there will be far fewer English and Theatre arts students?

You don't have to be much of an economist to figure out the university is not going to want to end up with only people who will make a low income.

Bill, I am totally in favor of college students having rich parents. Quick, before my daughter is graduated from high school, can you tell me where to find some?

Tyler: would you or anyone posting here know the extent to which six-year undergrad programs necessitate or consist of remedial coursework?

Yet again, I call vainly for the quick elimination of ALL remedial course offerings from ALL post-secondary schools.

Remedial college coursework is just one way that states that promise universal free education through high school for all citizens can get private individuals to subsidize them. As long as state school districts can get someone else to do the job they are getting paid for but not doing, you won't see a change. Too sweet a deal.

Best you can hope for is an intermediate level of ed (community college, mostly) will move in, and kids will get their remedial work done in between high school and college entry. Some efficient students are using state programs that allow dual credit, so they can get their remedial coursework in through community college outsourcing before they actually leave high school. That may help, convoluted as it is.

It'd help if colleges put the foot down and say no at entry to sub-par applicants. If need be, start a subject-SAT for stuff that's otherwise hard to test for.

I went to a little-better-than-okay rural public school, and we could get credits through a local CC for "advanced" versions of classes we had to take anyway (Chemistry and Spanish, for instance). I didn't take as much advantage of this as I should have (my mom wouldn't pay for one semester of Chemistry for a now-forgotten reason), but even so between that and the AP classes we had available, I had nearly a year's worth of college credit when I finished high school, all of which were accepted by my SUNY school. I'm not sure what I could have maxed out at, but surely at better schools that offer every possible AP class, people must be leaving with nearly two years worth of college credit, right?

It seems to me that remedial classes at relatively expensive universities are pretty strong evidence that most students aren't making great financial decisions wrt their education. If you were comparison shopping, you'd get the Algebra II and Basic Composition classes at the local community college, which is perfectly capable of teaching them and which will cost you a fraction of the money those classes will cost at the local state university.

When do students realize they need a remedial class? Perhaps it is after the attend a regular university class.

When do students realize they need a remedial class? Perhaps it is after the attend a regular university class.

A substantial portion of students take remedial classes on immediately.

"Yet again, I call vainly for the quick elimination of ALL remedial course offerings from ALL post-secondary schools."

I don't disagree, but in practice this means that 80% of blacks and 70% of Hispanics can't attend higher education (500 per SAT section is, roughly, the cutoff for remedial/non-remedial). Politically, it makes much more sense to say we're sending blacks and Hispanics to college and then let them fail there, than it would to create a rule that actively prevents most of them from going.

If we did that, the remedial level would drop from 500 per test to 400 per test. So here are your tough choices: 1) let anyone in, but stop a bunch of them from getting a degree by fairly high remediation standards, or 2) declare that only non-remedial students can go to college, and watch the remediation standard drop.

Those are your choices.

I think we might get away with setting an SAT/ACT standard for our public universities, sending anyone else to either private college or community college. This is what I'd probably recommend working towards:

As is often the case in policy (just ask Alex), this experiment began in Australia around two decades ago. Australian university student's tuition fees are funded by the government, which accumulate as a debt indexed to the CPI, and repaid via the tax system. The repayments are only made if the student earns over around $40k per year and form a percentage of income which varies by income (between 5 and 8 per cent). Bruce Chapman of the ANU was instrumental in developing this system.

This is just another example of Australia leading the world in policy development (again, just ask Alex).

You can read more on Wikipedia; it's called a HECS-HELP loan:

Yes, the Australian scheme works quite well - at least in the sense that most Australian students and recent graduates are satisfied with it.

Helps to be a booming commodity exporter with rapid GDP growth.

This policy has been in place for 20+ years, and has worked well throughout that period, including well before any commodity boom.

get your facts out of my argument!

Governor John Silber suggested this in1989, except that the payback would be through the tax system (and a tax levy, placing it ahead of other debts), and that the payback would be only on that income above the median income of a high-school graduate. The percentage he suggested was higher than 3% - it was 10% if I recall correctly. But I think Silber's plan would fund room and board, also.

Nice to see someone else remembered this bit. The details are in his book Straight Shooting IIRC. I liked it then and still like it now.

I assume the 3% is calculated off of personal, rather than household, income. So, a potential jackpot for homemakers or those working only part time outside the home.

I also darkly speculate that in the future the 3% income levy may be waived for those engaged in politically desirable occupations (e.g. teaching).

Are the European universities really worse than the United States? Granted, there are more American universities in the top 20 (or 50), but isn't that just a result of better sorting over the greater country? There are relatively little sorting across countries in the EU, which of course leads universities to tend to the mean.

Most of those international university rankings are based on research output and intended more for use by international scholars applying to grad school, not undergraduates.

Take the THE ranking: research contributes 60% overall, through 30% citations and 30% "Research — volume, income and reputation" (whatever that is). When looking at citations only (which should be the least debatable indicator), the American dominance is far less clear.

Glad Oregon and not my state is trying this.

+1, I'm more than happy to see somebody else experiment with this idea.

Since I know it well I will take my situation as an example. My first degree set me back 48,000 in student loan debt. I am currently attending college again (where I will add another ~60,000). Just paying back the 48 at this point my student loan minimum payment accounts for ~38% of my take home pay (I work a full time job while going to school full time). I started paying my student loans back in 2008 and according to SallieMae at my current level of payment they will not be paid off until 2029 (21 years). In order for me to pay 3% my salary would have to be 12 times higher than I currently make.

Being that most students that graduate with debt will pay more than 3% would it not be better for most students to take up this offer? It would create more disposable income that would be spent else where in the economy. While 3% for 20 years seems like a lot, no matter where my career takes me I do not see myself making 12 times my current salary level. I could be wrong in than estimate but that would still give me a higher percentage of my income to spend in a different area of the economy (eating out, dates, house, car, vacations) all of which I can not afford or not very often.

Just my thought process on this issue.

In other words judging from you example, there's no way in hell this scheme will ever be self financing.

You borrowed $108,000 for 2 bachelor's degrees?

This is a good idea, but it is criminal in the current environment. I would rather have students rack up debt that will, in the end, be discharged during the coming debt Jubilee or financial collapse, rather than becoming indentured servants.

Shut down 50% of universities (or cut enrollments across the board by 50%, and then implement this plan.

And what do you plan to do about the 50% of no-longer-prospective students who need to earn a living in an increasingly automated economy?

It seems obvious one big thing you'll get here is an influx of people who otherwise would not have gone to college, accelerating the trend. That will be particularly striking if the payment is exempted for folks making less than 40 a year, since those guys will then have almost nothing to lose by attending college (except time spent working a job and earning income now) and everything to gain (potential middle class admittance, or at least the whiff of it). Soon there will be enough folks in this category attending that it will begin to be an extreme mark of shame to have not attended any college at all -- more even than now -- comparable to having not graduated high school. More acceleration. It will merely blow the balloon up further, artificially inputing people into the system who really don't want to or need to be there. And there will be an opportunity cost to society, since many who don't attend college now enter skilled trades (which we need) or become entrepreneurs or continue a family business.

Huge non fan of debt for school here, but the only way to address this is to move the market back in and get tuition prices back into the general area of nonridiculous. Leaving tuition at its current crazy levels and paying for it differently won't fix anything, it will just delay the next bubble burst.

Are you assuming that supply will rise to meet the increased demand, or will the schools become more selective? And will they make selections based on future potential earnings?

I assume supply in this case will be fairly flexible. Either universities will increase class size until they are able to throw in more instructors and administrators or smaller schools will expand or open to meet demand, or both. I would also assume there is a glut of folks with general degrees that can be hired to teach general ed coursework, there usually are. We're well on the path already, I can't think of anyone who wants to take classes in "higher ed" who can't, they just have to find the right supplier. Expanding supply of instruction in mechanical engineering or ancient Greek, that would, of course, take some time and muscle. But I'm not talking about people that want to become engineers, I'm talking about the guy who would normally go into his dad's plumbing business or the successful retail worker who wants to move into management, who now feel they must have at least an associate's degree on their resume or they can't get / keep their position (or hold their heads up in conversation when their peers are discussing their college courses).

I've become a big fan of Clay Christensen lately, it seems like this is perfectly disruptive, markets coming in at the bottom and offering cheap products widely desired, except in this case the desire would be largely manufactured by government policy.

I don't think we'll reach the point where everyone will have a PhD from the college on the corner, but we'll get closer; and, of course, the PhD will have an education no better or worse than the high school grad of five decades ago.

In that case, I think the quality of the "better" schools would remain stable (or perhaps increase with the expanded pool of applicants), while the new schools that spring up will issue diplomas with little to no value (see: Liberty).

It might be possible that you could even get increased quality and decreased offerings at "better" schools, but I'd think that would have been happening already, and is it? It seems like the inflated cost of tuition makes taking in "sub-par" students way too fish in a barrel to pass up.

Liberty's a great example, in a world where university prestige matters, Liberty's diploma has little to no value. But that's a fairly narrow world. In the many other worlds (the small world where having a degree with "Christian" in the subtext serves as a fish in the sand and that's a good thing; the larger world where the interviewing boss has no idea what Liberty is but knows it's got "University" after it's name, and that's good enough) it will have nearly as much or more value than a degree from Tulane (which boss hasn't heard of, either), and at less than half the cost.

That's perceived value, of course. As for inherent value, that has been largely divorced from tuition rates for decades, right?

I'm not sure of the details but some tweaks might be:

1. Don't make this a blanket entitlement. Oregon should select who it allows to take advantage of the program based on past performance, major choice etc. That'll reduce the adverse selection.

2. Why not offer a mix of loan and equity? That again reduces the freeloading component (e.g. potential housewives?) and penalizes dropouts.

3. That 3% rate should also be made variable based on assessment of a students future potential. It'd make sense to offer a better rate to the brightest prospects of future earnings.

4. 3% sounds too low. At least in the first years after grad school many young people (ok, the good ones) could easily afford a 10% rate with a very marginal impact on lifestyle.

On the downside, I wonder if this will in the future spike emigration of successful Oregonians?

.,.....meant to write "in the first years after graduation" Not grad school.

"At the end of the day, I am willing to let Oregon make a likely mistake to find out how this works"

Spoken like a true academic! Thanks!

I have come to view policy as experiment, which makes it more fun and less frustrating. It has also had the effect of making me less partisan. In the long run, I think it's good that various ideas, even kind of kooky ones, get their chance to have a go at it, within reason. Many policies work and/or fail in unexpected ways, and there's no better way to find out how than to just put them into practice and see what happens.

I understand how horrifying some of the implications of this stance might be to people... but that's part of what makes it more fun.

Laboratories of democracy.

“At the end of the day, I am willing to let Oregon make a likely mistake to find out how this works”

I'm sure Oregon is pleased to have your qualified blessings. :\

I'm pretty sure Yale tried a variation of this around 1968 and ended the plan a few years later. One percent of income for life I believe.

The Wall Street Journal did a very interesting article on the end of this program (mid 1990s I recall reading that). The students who had taken the deal were bitter about repayment, and noncompliance was high, since Yale did not have powers of the IRS. Look at this video about the correlation between class and names in English society. Go to 3:24 to hear Tyler Cowen!

See also the discussion between Reihan, Konczal, and myself the last time this came up.

British students are expected to pay back student loans on an almost identical schedule. They get $ deducted from their pay check for the rest of their lives and don't have to pay if their income doesn't meet a certain level. Hard to say whether it actually works for them or not.

Well what do you know. College education isn't a human right in Britain either.

I'm always surprised how, in reality, all the countries that crow about their enlightened Third Way are really not so different from the US. Let me guess: Britain has a rather complicated tax code which treats capital gains differently than 'ordinary' income. I bet they offer private health insurance in the land of 'free' medical care as well.

Not quite, any outstanding balance is written off after thirty years. Although nominally a loan it is effectively a graduate tax. If you are on very high earnings it may make sense to pay it off early, but for most it doesn't as they would be nowhere near paying it off by the time it is cancelled.

If this was done in Australia successfully, have Oregon officials looked at the Australian program? Could it just be copied?

I'm ignorant of the Australian progrram myself. Wouldn't this work better if the employers were billed? After all they are getting most of the benefit from the university training their potential workforce. The students themselves would have little use of the degree (other than general benefits of increased knowledge) if employers weren't requiring it as a precondition of employment.

The problem of the humanities student using the program to free ride and then take a low paying job later may not be as big as it appears. The marginal value of the college degree to a student in this category is very low in the first place. The school may prefer to concentrate instruction on the higher earning students, but then the program gives the school an incentive to do this (is there open admission?), and I suspect that if the low earning students really divert resources away from the higher earning students they will be screend out. If they actually don't cost that much to educate, no harm, no foul.

The best way fo the employers to pay would probably be a tax on salaries, dedicated to the university system, with tuition "free" but then the universities are not admitting everyone. I understand what I just described is probably close to the norm outside the US.

The difference from the Australian system is that you only pay back a fixed $ amount (that is indexed over time), rather than a proportion of your salary. For example, someone like me, who has $30 k in debt, pays back approx. 5% of their income until they have paid off the $30 k debt. This seems superior to me because it removes the adverse selection effect of the Oregon system (whereby I would expect highly talented individuals to avoid their system like a plague, because it would cost them too much).

The service academies have always done this. No cost to attend, but you must serve in the Army/Navy/Air Force/Coast Guard for 5-6 years after graduation.

Not an exact corollary, but similar.

They also have an interesting way to handle drop-outs. The first two years have no penalty for dropping out. Once you start your third year, you must repay the cost of your time, either in $$$ or time served as an enlisted person, or both. We called it "two for seven." Once the first two years are finished, you're on the hook for seven more.

Well, the services have a unique advantage in this context being the only legally allowed avenue of indentured labor in modern society. I doubt there's any other similar contractual arrangement that courts would allow.

At the end of the day, the question is: Should education be required to meet a return on capital requirement?

Can a society afford to invest as much as $200,000 in an education with poor economic returns? Or should education be put to the same test that any other investment decision would?

Yes. And I think the question applies whether we pay communally or as individuals with individual impacts.

You're begging the question of externalities. Well, OK, we can debate that.

But the issue is the internalization of costs. Does the student need to perform to achieve the required rate of return on capital? Because if he doesn't, he may major in something which has relatively poor employment prospects. If there's some theoretical gain to education, but the student is not motivated to achieve those, then you lack a transmission mechanism, and therefore won't be able to capture the externalities, even if they exist on paper.

It's true, but I guess I consider the decision making of the average student pretty irrational much of the time anyway, so it seems like the distortion wouldn't necessarily be such an issue in that way. Many students, maybe most, are under pressure to buy the most expensive product (because value is judged solely on sticker price and brand) using other people's money (in theory their future selves' money, but with the current American ability to predict consequences of actions it might as well be someone else's money). You can't get too much worse than that when trying to promote rational student choices.

I also think you'd have to consider whether the incentives the program looks for are actually a societal good. Conventional wisdom right now says we need more people making more money. But if we find at some point (some of us already consider it so) that making money is not necessarily directly proportional to being productive for a society, or if we find at some point that culturally we begin to value the ability to (to take the above fun example) evaluate the history of theater above the ability to titrate properly, a percentage-of-future-income scheme would be ill-considered even if it transmitted well -- if that makes any sense. Of course, I guess if at some point theater becomes the new chemistry they will start paying theater historians well. . .. .

Just to correct a point, students are not really driven to choose the most expensive schools. The price differential between the elite schools (and for the wannabes for that matter) is fairly trivial. Students are driven to get into an elite school. Since prices are pretty much the same cost is irrelevant. Going to the top ranked school costs about the same as going to number 10. If they really want to save money, they need to go further down the ladder. (If the student is sure about a major, LOL, there is some ability to differentiate on costs and quality by going to some state schools that are ranked in the top ten for some given majors. Even then, you need to stay in-state.)


Steve makes sense, there is clumping as a factor.

Of course, I guess if at some point theater becomes the new chemistry they will start paying theater historians well.

I suspect that chemistry is just intrinsically more valuable to society that theater history, But that's just my right wing loon point of view.

When the number of people going to college was relatively small and relatively elite, society was being docked too much for being a history major. (I was one.)

But as you expand the pool of people in college, the aggregate cost to society goes up and the benefit from education potentially goes down. Being a history major at Brown is not quite the same as marketing communications major at Ryder. Nor is a graduate of Brown likely to face the same graduate school or employment prospects as one from Ryder.

So I think you have to be careful with the value proposition for colleges as college itself becomes more universal. I personally think internalizing the costs puts pressure on students, on the one hand, and academia, on the other, to find programs and delivery mechanisms with the best return on investment.

should be ... "not being docked too much..."

JWatts -- I was joking with the particular example, since it's pretty over the top. But here's my basic point. Two hundred years ago, the Jefferson crowd would not have considered studying chemistry very intrinsically valuable. Nice hobby, but nothing you could make much of a living off of, or change the world with. Two hundred years from now, if all chem majors are working on WMDs for Syria and taste-testing petri dishes for Pepsi because no one any more has any sense of history, decency, or good taste, we may come around to ranking chemistry down again. Or wish we had when we'd had the chance. Manipulating the degree market for social good is a chancy thing, I think -- but, then, that might be just my right wing loon point of view!

Well, Marie, now you're making a slightly different point, and that is, "What is being cultured worth?" (Oh, no, an almost Tyler-like post title!) That's a very interesting question. I also value culture and a broader knowledge. I think it relates to empathy, an ability to see the bigger picture, and the ability to synthesize information of different types from different sources. It is the sort of capability I associate with the classic senior manager or someone running the British Empire.

However, how deep does that impulse go in society? Is this some real elite impulse, affecting say the top 5-10% of people, or is it something which, say, someone in the 65% percentile should have?

And must this be taught through some sort of indirect assimilation as part of a liberal arts education? Moreover, has the ubiquity of information devalued this kind of education? It used to be that knowledge of far off cultures and obscure events was inaccessible. Today, you can get the Egypt revolution blow-by-blow on a live feed; read about great Mexican restaurants in Beijing on Tyler's blog. And further, society has become more accepting overall. I think changing attitudes towards gay marriage is just one example of that.

So does that elite liberal education still matter as much as it did? Do it matter to everyone who attends college? Does attending college make you "elite" the way it did in 1970? And must a cultured, humanist view be imparted through the hugely expensive distribution mechanism which our educational system has become?

Mr. Kopits,

I have to admit my points were just examples, as I don't know that being cultured in the way you've noted is any more valuable than being technologically skilled. I do pretty seriously believe that being only one (either one) without the ability to comprehend the other means you aren't really so much of the one, either. But that's my prejudice. I just think that if we make a social decision based on conventional wisdom (STEM! More STEM! Everyone says so!) and back it up with government coercion (even through bribes) we are being very short sighted.

But on your point, my personal point of view is that university study can do little (particularly these days) to promote culture in any segment, but it can do a great deal to destroy it. And my personal point of view is that most humans are capable of developing the kind of expansive and intensive understanding of the world and humanity that I think you are referencing. Some folks do it by reading Jefferson and Tolstoy, some do it by reading their neighbor (which Jefferson and Tolstoy also did well). But whadda I know. So I really shouldn't have to power (even if I am in a state legislature) to make or influence the decisions of individuals about what they want to pay to learn.

So I think we're largely still on the same page.

"Being cultured" is consumption spending, not investment spending.

Now, it's perfectly fine to have consumption spending. But don't pretend it's investment spending, no matter how much the salesman is trying to call it that.

Mr. Weber,

Good distinction, but I think it depends on the situation of the individual. As a population, generally engineering will be more investment and less consumption. But for any one individual, that might not be the case. And times change.

For Jefferson, for example, and his career track, engineering would have been more of a hobby / pastime sort of thing, more consumer. Study of philosophy and economics, etc., panned out for him pretty well.

In the present situation, it's easy to mock history and English majors -- I do it all the time. But there is something to be said for getting a general degree as quickly, easily, and cheaply as possible in order to have that ticket in your pocket, then putting your effort in to whatever field you move into after college. If you're going to pursue engineering, for example, you are not getting anywhere without at least a Masters. If you're the exceptional guy or gal who gets the scholarships, grants, and fellowships and makes the connections, that's golden. But the average Joe is going to struggle. Failing in a practical field is not necessarily a better investment than succeeding in a something more mushy.

Unfortunately, the reasonable option (skipping the degree if you can't get a good investment degree) isn't an option in our weird society, which requires that our young people give their pound of flesh to the system before they can be admitted to most fields.

If it is an equity position, can it be shorted? I want data on liquor consumption. Is there some annual report that the equity owners can see?

I suppose that any pretense of freedom disappears when a state introduces such a scheme. We own you and all your future production. Wasn't that called serfdom or something similar at one time? Now it is progressive.

Well, if you actually believe in the increased human capital model of education, then what they've given to one they've denied to another.

Reality however is that your education gets you your first couple jobs. How much can 4 years of training really be worth (particularly when maybe it should be 2 years)? So, a reality-based system might indicate you'd pay for 10 years or something.

Would you consider some amount or type of liquor consumption to be positive? If they're drinking whisky fairly heavily, maybe they're preparing for a career in law.

Take the deal, get the degree, move to Florida and declare bankruptcy. Yeah, Oregon's plan is bound to be a total fuckup. I ran a few numbers based on personal knowledge, and the discussed numbers in the Oregon plan make no sense whatsoever.

Per derek, it would be better done as a 3rd party. Then, yes, you could short universities, majors, departments, and even individuals, if you're nasty.

And you could short the idea as a whole. Are we talking about a financing scheme, or a way to align the incentives of education finance to student outcomes?

First, convince me that we're talking about a public good.

If a college-educated workforce is a public good then it should be very easy to figure out how to get everybody paying the freight, rather than relying on increasingly extruded financial schemes and Federal Reserve purchases.

Maybe whether education is a "public good" as that term would be defined by an economist is not the point. If you think that (1) states compete to attract smart, motivated people, and (2) that someone is more likely to stay in the state where they attend college, you might come to the conclusion if you are an Oregonian that spending money onOregon and Oregaon State, and on students going to those schools, is a good thing. Now, those assuptions might be wrong, but that is a reasonable way of looking at things.

if you are an Oregonian that spending money onOregon and Oregaon State, and on students going to those schools, is a good thing

Yes, but since Oregonians have a finite bucket of money, and there are a multitude of ways to spend the given money, then surely the better question to ask is, "Is this a better way to spend tax payer money, than say, funding more charter schools? Or subsidizing more wind power?"

At the very least you need to calculate the ROI of this scheme, so you can compare it with other schemes.

I'm pretty sure I didn't say that this particular proposal was the best. I was responding to a statement that before anything else happens, let's figure out if a college education is a public good (by which I assume A-G meant something that you can consume without reducing its availability to others and from which no one is excluded), and suggesting an alternative way of looking at it, namely, competition between states for smart people. In other words, a discussion about "why would we want to do it at all" instead of "how do we do it."

If you're using public money, it's exactly the point. As should be abundantly clear by now, public funding of tertiary education has created all sorts of distortions. And I'm not sure the case has been made for publicly funded secondary education either.

Okay, good luck convincing ppl in whatever state you live in to go along with your ideas.

The program is stupid from the university's point of view if only for the fact that under the current system it gets full freight from the Federal Government no matter what the student's outcome.

This is a horrible, horrible idea.

This is not a way to help students pay for college. It's a way for colleges to have even more price discrimination practiced upon their customers, now being able to look at what you "can afford" 24 years into the future, all backed up by the power of the state. Thanks a lot.

Schools now have the ultimate lever in which to extract 99.9% of the consumer surplus that the college degree supplies. Right now it's "3% of total wages" but there's nothing locking in to that number.

What's next? Should my car company get a piece of the salary I make at the job I drive it to?

Again, this is EXACTLY wrong. It will attract people to any meaningless degree. We need to push people toward majors that are needed, not any old art history or underwater fire prevention degree.

I don't see a connection between the price (3% sounds arbitrary) and Oregom State's costs. Even if those numbers line up now, they will diverge in the future if the cost of an Oregon State education outpaces income growth.

Why not go a step further? Make college free and pay later with a progressive and high income tax. This is the German model and it works pretty well.

You going to put big barriers on who gets to go, too?

On average, a German student spends 13.5 semesters at college and finally leaves school at age 32, after breaks for travel, work or military service.


If you want more of something, then subsidize it. The Germans are heavily subsidizing college.

Of course quantity is not quality, Caveat emptor, etc.

My impression is that there is a kind of funding-driven bubble in higher education, rather like the ones in medical care and (until recently) in housing prices. Until that gets fixed, any way of paying for tuition is going to be unreasonably expensive, because the prices just keep going up year after year.

An effective education system should match value to cost. What we have today is more of a taxpayer-subsidized semi-merit-based credentialism.

I think the future is not something like this, but something more like Udacity or MRU -- if you get a lot of people to sign up and offer a real credential, you should be able to make a lot of money while charging relatively little. High-skill professions already have systems like this.

"taxpayer-subsidized semi-merit-based credentialism."

That is brilliant, right on the mark.

"High-skill professions already have systems like this."

And the people in those professions are the ones I expect to be able to learn from such systems. I would not assume that this kind of teaching/learning will be effective for the large majority of people. Talk with some kids who have tried some of the online stuff and you will get very mixed reviews, even from very bright and motivated ones.


It's wrong on principle for two reasons: first, government should not at all be in the business of education (just the subsidizing of education by government is how we have a higher education bubble which rivals the housing bubble); and second, having adults pay back the state sends the message that their lives are not their own but, in some small way, the property of the state; such a thing is in keeping with the statists worldview. The only hope for higher education is to take government subsidy out of the equation and, at the same time, to have private educational providers move towards a Khan Academy approach.

Presume Tyler has read it but The Unincorporated Man basically explores the ethical side of this (taking it to the Nth degree). It is an excellent book.

Agreed. Good to see that my expectation of someone already mentioning the obvious work on the issue in the thread was accurate. :)

The substance of the actual Oregon house bill (3472) is only one page long and merely authorizes consideration of a pilot program and furthe study. So none of the details has been worked out. Even if the program works as intended, won't the results be pro-cyclical by tying college funding to swings in personal income? The temptation to maintain current rates of spending based on rosy predictions of income 20 years from now will be overwhelming.

Do they have to pay 3% when they're making less than what non-college graduates make?

Higher Education funding is a great example of The People's Romance. Equivalent procedures that are considered unconscionable when performed by private actors are considered third rail policies when performed by the government.

So, we can't fathom students approaching private lenders with a well-thought out plan for how they will graduate and what income they expect to have, hoping to earn funding for a useful education, but if the government offers practically unlimited money, no questions asked, with a lifetime claim on earnings or non-dischargeable debts, only unfeeling anarchists would dare oppose it. It's baffling.

I would be shocked if private lenders demanded well-thought out plans from people seeking student loans, considering that a private lender thought it was a good idea to give me a $15,000 credit card limit when I was in college. (Of course, maybe it is the government's fault, since the lady at the credit card company booth who gave me a free t-shirt for applying told me that I could count my student loan money as "income.")

There's a difference between consumer credit with a 25% interest rate and investment capital. I had credit cards like that in college, too. But, when I applied for a business loan with single digit interest rates, the bank was very interested in the means I would have to pay it back.

Your business loan would be dischargeable in bk. Of course the bank is going to be concerned about your business plan.

I expect adverse selection to be a pretty serious problem with the Oregon program. High income potential students will be much better off taking loans. Tyler actually posted a link to our company Upstart a few months ago - we let young people raise money in exchange for a % of their future income, but offer rates ($ per %) to people based on statistical predictors of income potential such as field of study, academic track record, etc. We've found that even at the same school, income potential can vary widely (see, which makes the set up of the Oregon program very problematic.

Costs will skyrocket because no one is paying the bills -- the education is "free" -- and taxpayers will get shafted. Garnished wages will be less than projected because our economy will take a long time to recover from the damage of the last six years -- so taxpayers will get shafted. As the decades pass, people who do get jobs will get tired of paying for 17 year old degrees, and politicians will come up with numbers exemptions and deductions -- causing taxpayers to get shafted.

In other words, this will be a big hit with liberals. Expect it to catch on.

I fail to see why conservatives wouldn't support something like this? Is it really a politically divisive issue?

If there is an escape clause, I don't see it as being very politically divisive. But if someone can sign on the line and set himself up for having to pay 3% of his income for decades, that's indentured servitude, and generally frowned on by traditional conservatives. As well as traditional liberals. Traditional.

Most other schemes are de facto servitude, but at least you can dream of escape.

To make this work, you'd have to make the university be the one that gets funded by said income percentage, so that they try to minimize their costs while maximizing their returns: Make them win if they pay a pittance providing the schooling, while their students end up making millions of dollars.

If incentives are aligned, I don't see why this wouldn't work. Now, for this to really work, the university has to be able to, say, be able to have quotas in unproductive majors, and have a real admissions system that minimizes the chances of freeloading.

This is, in essence, an insurance business more than a loan. There is a defined benefit, and the actuary has to figure out how much to ask for to break even.

Since most HS students have an unhealthy proportion of their assets tied up in themselves, this would seem to provide a good hedge. If it encourages colleges to try to add more value, so much the better.

How are European/British-world systems worse? They cost far less and produce roughly the same percent-of-population of college grads. At the very high end, of course, the difference is obvious - Harvard, et al., don't have equivalents in Europe. But then the vast majority of American students don't have access to those schools (and there isn't one in Oregon), so it's a moot point for almost everyone.

And incentives to improve education don't have to come through funding. K-12 education has been steadily improving since the 60's (look up the NAEP data), and that's funded through the state. Incentives can come from elsewhere.

I'm surprised no one has cited Milton Friedman's proposal from the 1950s (my apologies if I missed a comment). "The individual would agree in return to pay to the government in each future year x per cent of his earnings in excess of y dollars for each $1,000 that he gets in this way. This payment could easily be combined with payment of income tax and so involve a minimum of additional administrative expense. The base sum, $y, should be set equal to estimated average" An ungated version is here:

"At the margin I would expect this to attract people who don’t have a vivid mental image of the distant future."

You mean like 18-year-olds? Seriously, this describes *everyone* I've ever known at that age, including my own past self.

"At the end of the day, I am willing to let Oregon make a likely mistake to find out how this works. Go ahead guys, do it, we are all watching."

big of you, to let us do it.

as to europeans moving to "our model" -- alas, we ourselves have moved from it with increasingly dire consequences (no one beats us for educational achievement among boomers, while for those younger we're now an also-ran).

The private sector is also working on this:

They focus on latin american countries right now (and are moving into the US) but have much more historical data since they've been around for a while. My colleague here at Vanderbilt, Miguel Palacios, co-founded this venture many years back.

I took a course with Bruce Chapman last year on this the topic of Income Contingent Loans. It was the best course I've ever taken. The Australian system has the benefit of the IRS equivalent of taking the debt out of a federal system of income tax. It doesn't matter where in the country you live, you will have debt taken out of your income. There is no serious issue of people leaving Australia to stop paying the debt. In addition, there is no option in Australia for private funding as no banks offer student lending. So unless your parent's stump up the cash, nearly every single person has student debt if they attend university (domestic students only). In addition, the debt does not attract any interest (only CPI linked inflation) and is paid off once you pay your fees. A major part of the course was the issue with having pure income contingent equity based loans, given that people are much more likely to shirk. In Australia, at tax time, you get a little note from the IRS saying how much debt you have and how much you paid off the year before.

Further, all Australian university places are earned on merit from high school tests scores. This reduces the adverse selection with specific cut offs that are higher for degrees such as law and medicine but lower for the humanities. If you score poorly, you won't be able to go to university. Tier one degrees (law,medicine) accumulate significantly higher debts. Research over the past twenty years has found absolutely no impact of adverse selection as we are talking about 18-19 year olds who generally don't understand how that works.

While there is the fact that in Australia, domestic education is subsidised by international students, in the future if this ceases, the level of debt can be increased, the threshold to repay (currently about AUD$48,000) can be dropped AND the rates of repayment could be increased (kicks in at 4 percent, raising to 9 per cent at about $90,000). It's a very versatile system that has complete acceptance across the political spectrum. There are even radical measures that could be taken, such as placing student debt into an estate when someone dies. But none of this is required at the moment.

There are now literally dozens of countries attempting to introduce this method of funding. It is successful and fantastic. For the life of me, I do not understand the US higher education system. The Australian system promotes inter-generational equity and mobility. It leaves people without standard debt when they finish university (student debt does not count towards any mortgage application etc or other loans). It's win win win, with the State underwriting any losses, which at the moment are small as a proportion of the overall system (however this may change in the future).

The comments about people who are happy this isn't happening in their state completely baffle me. Since when did the US come to have an anti-innovation agenda? Isn't state legislatures taking a risk on a new policy initiative a positive thing instead of endless arguing? From an Australian perspective, this, together with the recent 'debate' about immigration, are incredible. Last year for example, the Australian H1B1 equivalent granted about 70,000 visas through a program that is completely uncapped for skilled labour (more information on this program here This, into a labour market of just over 11 million people. In addition, there are currently 300,000 international students, about 180,000 J1 visa holders and about 180,000 new permanent residents every year. What's the matter with change, even if it's not perfect?

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