Oregon Is Doing Free Higher Education the Right Way

On Monday, the Oregon Senate unanimously passed a bill already passed by the Oregon House that creates a study committee to develop a pilot program for making Oregon public higher education tuition-free (I, II). From The Wall Street Journal:

Oregon's legislature is moving ahead with a plan to enable students to attend state schools with no money down. In return, under one proposal, the students would agree to pay into a special fund 3% of their salaries annually for 24 years.

The plan, called "Pay it Forward, Pay it Back," would create a fund that students would draw from and eventually pay into—potentially bypassing traditional education lenders and the interest rates they charge. The state would likely borrow for the fund's seed money, which could exceed $9 billion, but the program's designers intend it to become self-sustaining.

[...]

Under the Oregon plan, students who don't graduate would still pay a fraction of their incomes into the fund; the amount would depend on how long they were in school.

[...]

Using 2010 census data not adjusted for inflation, Mr. Gettel estimates students would pay an average of about $800 back into the program the first year after graduation. As their incomes grow, that would increase to about $2,000 in year 20, by which time they would have paid off the cost of their educations. Over the next four years they would contribute an additional $7,400, which constitutes the pay-it-forward aspect of the program—a sort of finance cost, Mr. Gettel said. Students would pay more or less depending on how much money they earned.

So Oregon is basically toying with implementing a universal income-based repayment (IBR) scheme, something I have been (probably excessively) advocating on behalf of for over a year (I, II, III, IV, V, VI). The idea is simple: make college free at the point of delivery, but impose what amounts to an income surcharge tax on college attendees after they leave.

As you may know, the federal government already has an IBR scheme, but it is not universal. Instead, it is a repayment option debtors are allowed to opt into. While better than nothing, its lack of universality presents severe problems, e.g. adverse selection into the system by those with high debts. Implementing IBR across the board ensures that everyone pays into the scheme, which should avoid most of these problems.

For the most part, those howling about student debt have rather uncreatively focused on publicly funding higher education through general revenues. This is a system some states have had in the past, but it was not a good system then, and it is not a good system now. The problem with financing higher education in that way is that it is deeply unfair to those who do not attend college. Those who attend college come from disproportionately affluent backgrounds, and have disproportionately affluent futures. Funding college through general revenues therefore represents, at least in part, a transfer from the relatively poor people who do not attend college to the relatively rich people who do. This is especially true when we are talking about higher education funding done on the state level because, unlike federal taxes, state and local taxes are regressive, i.e. poorer people pay higher tax rates than richer people.

A universal IBR system like the one Oregon is proposing does not have these fairness problems. Only those who attend college pay into the revolving fund that makes college tuition-free. The relatively poor set that never attends do not pay into the system at all.

Additionally, because a universal IBR system requires individuals to pay back a percentage of their income, it ensures that graduates that go on to more lucrative careers effectively subsidize graduates that do not. So, it is (in a sense) internally redistributive, which is a positive from an egalitarian perspective. Finally, because repayment is based on income, no one will find themselves overly burdened by the repayment obligation.

When you put it all together, it seems clear that universal IBR is the best way to go about making higher education tuition-free. It boggles the mind why campaigners in favor of tuition-free higher eduction rarely speak of the concept. Hopefully Oregon's adoption of such a system, if it goes through, will help popularize the policy.

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