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.


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