College for Free? 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.

TABLE 1. Projection of salaries and repayment costs of Oregon system

Current Dollars

Constant Dollars (Adjusted for Inflation)*

YEAR

SALARY

REPAYMENT

SALARY

REPAYMENT

Two-Year (1.5%)

Four-Year
(3%)

Two-Year (1.5%)

Four-Year
(3%)

1

25,000

375

750

25,000

375

750

2

26,250

394

788

25,500

383

765

3

27,563

413

827

26,010

390

780

4

28,941

434

868

26,530

398

796

5

30,388

456

912

27,061

406

812

6

31,907

479

957

27,602

414

828

7

33,502

503

1,005

28,154

422

845

8

35,178

528

1,055

28,717

431

862

9

36,936

554

1,108

29,291

439

879

10

38,783

582

1,163

29,877

448

896

11

40,722

611

1,222

30,475

457

914

12

42,758

641

1,283

31,084

466

933

13

44,896

673

1,347

31,706

476

951

14

47,141

707

1,414

32,340

485

970

15

49,498

742

1,485

32,987

495

990

16

51,973

780

1,559

33,647

505

1,009

17

54,572

819

1,637

34,320

515

1,030

18

57,300

860

1,719

35,006

525

1,050

19

60,165

902

1,805

35,706

536

1,071

20

63,174

948

1,895

36,420

546

1,093

21

66,332

995

1,990

37,149

557

1,114

22

69,649

1,045

2,089

37,892

568

1,137

23

73,132

1,097

2,194

38,649

580

1,159

24

76,788

1,152

2,304

39,422

591

1,183

TOTAL

1,112,550

16,688

33,376

760,547

11,408

22,816

Current Dollars

Constant Dollars (Adjusted for Inflation)*

YEAR

SALARY

REPAYMENT

Current Dollars

REPAYMENT

Two-Year (1.5%)

Four-Year
(3%)

Two-Year (1.5%)

Four-Year
(3%)

1

40,000

600

1,200

40,000

600

1,200

2

42,000

630

1,260

40,800

612

1,224

3

44,100

662

1,323

41,616

624

1,248

4

46,305

695

1,389

42,448

637

1,273

5

48,620

729

1,459

43,297

649

1,299

6

51,051

766

1,532

44,163

662

1,325

7

53,604

804

1,608

45,046

676

1,351

8

56,284

844

1,689

45,947

689

1,378

9

59,098

886

1,773

46,866

703

1,406

10

62,053

931

1,862

47,804

717

1,434

11

65,156

977

1,955

48,760

731

1,463

12

68,414

1,026

2,052

49,735

746

1,492

13

71,834

1,078

2,155

50,730

761

1,522

14

75,426

1,131

2,263

51,744

776

1,552

15

79,197

1,188

2,376

52,779

792

1,583

16

83,157

1,247

2,495

53,835

808

1,615

17

87,315

1,310

2,619

54,911

824

1,647

18

91,681

1,375

2,750

56,010

840

1,680

19

96,265

1,444

2,888

57,130

857

1,714

20

101,078

1,516

3,032

58,272

874

1,748

21

106,132

1,592

3,184

59,438

892

1,783

22

111,439

1,672

3,343

60,627

909

1,819

23

117,010

1,755

3,510

61,839

928

1,855

24

122,861

1,843

3,686

63,076

946

1,892

TOTAL

1,780,080

26,701

53,402

1,216,874

18,253

36,506

 

 

 

 

 

 

 

Current Dollars

Constant Dollars (Adjusted for Inflation)*

YEAR

SALARY

REPAYMENT

Current Dollars

REPAYMENT

Two-Year (1.5%)

Four-Year
(3%)

Two-Year (1.5%)

Four-Year
(3%)

1

50,000

750

1,500

50,000

750

1,500

2

52,500

788

1,575

51,000

765

1,530

3

55,125

827

1,654

52,020

780

1,561

4

57,881

868

1,736

53,060

796

1,592

5

60,775

912

1,823

54,122

812

1,624

6

63,814

957

1,914

55,204

828

1,656

7

67,005

1,005

2,010

56,308

845

1,689

8

70,355

1,055

2,111

57,434

862

1,723

9

73,873

1,108

2,216

58,583

879

1,757

10

77,566

1,163

2,327

59,755

896

1,793

11

81,445

1,222

2,443

60,950

914

1,828

12

85,517

1,283

2,566

62,169

933

1,865

13

89,793

1,347

2,694

63,412

951

1,902

14

94,282

1,414

2,828

64,680

970

1,940

15

98,997

1,485

2,970

65,974

990

1,979

16

103,946

1,559

3,118

67,293

1,009

2,019

17

109,144

1,637

3,274

68,639

1,030

2,059

18

114,601

1,719

3,438

70,012

1,050

2,100

19

120,331

1,805

3,610

71,412

1,071

2,142

20

126,348

1,895

3,790

72,841

1,093

2,185

21

132,665

1,990

3,980

74,297

1,114

2,229

22

139,298

2,089

4,179

75,783

1,137

2,273

23

146,263

2,194

4,388

77,299

1,159

2,319

24

153,576

2,304

4,607

78,845

1,183

2,365

TOTAL

2,225,100

33,376

66,753

1,521,093

22,816

45,633

* Inflation is pegged at 3 percent per year; wage increases at 2 percent per year.
SOURCE: Data created by W. Swail based on Oregon plan details.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.