Rethinking How and When Students Pay for College

It was hard to pay attention to the 2018 election without hearing a proposal for “free college.”

In the gubernatorial contests alone, more than ten candidates advocated some form of tuition-free post-secondary school. But the reality is that, just as with lunch, there’s no such thing as a free higher education. Even if enrollees paid zero tuition, somebody has to pay for the classrooms, professors, and administrators needed to educate a college student. The real question underlying free tuition policies is: who should pay for college?

For many free college proponents, the implicit answer is “the taxpayer.” But less than half of Americans aged 25 to 64 hold a four-year college degree. While society at-large draws some benefit from educating these college attendees, most of the value goes directly to the students; the returns to a degree in finance or engineering are largely realized through higher salaries for bankers or engineers. Should we really ask grocers and coal miners to pay their tuition?

The simple fact is that government-funded college is a regressive policy; it disproportionately helps those who are more advantaged, transferring billions of dollars to relatively affluent families—money which could be spent to alleviate poverty or improve primary and secondary education.

Why do so many progressive, reform-minded people advocate such a policy? To be sure, there are many appealing aspects to free college. Eliminating tuition would likely encourage enrollment among disadvantaged students, move the financial burden of college away from parents, and avoid saddling college graduates with student debt payments they couldn’t afford. The current system falls well short meeting these goals: Financial aid directs funds to the needy but lacks the simplicity necessary to overcome barriers to enrollment. Student loans allow borrowers to push some college costs into the future but lead many low-earning graduates to financial ruin. With these failures of the current system in plain view, calls for radical change like free tuition should come as so surprise.

But is free college the only alternative to the status quo?  What if there were a way to eliminate financial barriers to entry, remove the cost burden for parents, and lighten the debt burden for struggling student borrowers, without imposing massive, regressive government transfers?

The answer is to be more creative in the way we finance higher education. Instead of asking students and their families to pay huge sums of money at enrollment, we could recoup the cost of tuition from students if and when they can actually afford it. In other words, a college attendee’s financial obligation would rise and fall with their post-graduate income. We could even construct a variant on the “free college” model that operates in exactly this way—charge students zero tuition when they enter college, but then levy a special income tax on graduates when they enter the workforce. As graduates gain experience and earn higher wages, they can pay a commensurately larger share of college costs. If higher wages never materialize, they can pay a little less. If they land a great job with a six-figure salary, they can pay a little more. On average, borrowers would “pay their own way” in the long run, but they would also be insured against earnings risk, so college dropouts and other low earners wouldn’t have to forego groceries while trying pay down their student debt.

In fact, we’ve already made steps in this direction. Starting in 2009, federal student loans can be repaid through Income-Driven Repayment (IDR) plans, which peg monthly payments to a fixed portion of post-graduate income. In some of my own research, I’ve found that IDR can improve financial well-being for distressed student borrowers. More than seven million borrowers are enrolled in IDR plans, and similar alternatives are developing in the private sector. For example, Income Share Agreements (ISAs) allow private entities to provide partial tuition funding in exchange for a share of their future income. Sharing many features with IDR, ISAs are slowly emerging as a credible alternative to private student loans.

 

While they are far from a silver bullet, income-based financing options are beginning to address some of the shortcomings of the current methods of funding higher education. But even as these promising innovations begin to take hold, public discussion around higher education is dominated by calls for the government to make college free or forgive all student debt. The goals of these policies are commendable, but if we want a fair, accessible, and effective system of higher education, we should focus less on whether a student pays for college and more on how and when they pay for it.