The “shortsightedness” of “pay it forward” college financing

Via the University of Washington’s Office of Planning and Budgeting blog, the American Association of State Colleges and Universities (AASCU) has a new report on the “pay it forward” (PIF) higher education funding idea that has received a lot of play around the country recently. (Including in Washington, as a Washington Business Alliance blog post notes.)

The AASCU report is not positive about the idea, which

would eliminate up-front tuition and fee payments at public colleges and universities in exchange for students agreeing to pay a pre-determined, fixed portion of their annual earnings for an extended period of time following graduation. After PIF start-up costs are covered, the program would in theory be perpetually self-funded, with payments from graduates covering tuition and fees for those in college.

One of the many problems with this idea is that

Under PIF, high-earning graduates would likely pay significantly more for their undergraduate education than they would have through traditional student loans, as the individual’s financial debt burden would end at the conclusion of the repayment period, not after the principal and interest are repaid. On the other hand, low-income graduates may presumably pay less in the long run, if the total income assessed through the PIF approach is lower than the repayment formula for federal student loans. . . .

This leads to an adverse selection problem:

A number of PIF bills under consideration allow students to “opt-in” to the program, which could lead to students from wealthier backgrounds and those pursuing lucrative careers to not participate in the program. One leading scholar referred to this as a “classic case of adverse selection—borrowers who would be subsidized participate while those who would subsidize stay away.”

The revenues would be disconnected from expenditures, and institutions would be exposed to more funding volatility:

Under the current tuition and fee system, college and university leaders collaborate with governing boards and political leaders to craft tuition policies designed to meet institutional needs while respecting the financial realities of students and families. Under PIF, however, there are no assurances that revenues would align—or even come close to meeting—institutional expenditures. . . .

In the short-term, an economic downturn could be much more detrimental to campus budgets under PIF, due to declines in both PIF revenues and state funding of institutions. In the long-term, PIF locks in a repayment rate that may not correspond to the needs of campuses two decades into the future.

Ultimately,

PIF is a sweeping policy concept that would address none of the underlying factors associated with leaving students with deep debt burdens. It would create considerable financial uncertainty for public colleges, and may spiral into an administrative nightmare that would leave graduates, campuses and states worse off over the long term. In sum, it would create an extraordinarily long tax on a public college undergraduate education that would make college much more expensive for most graduates. . . .

The fact that more than 20 states have introduced PIF legislation in less than 18 months is alarming in its shortsightedness in providing a legitimate solution to addressing college affordability at America’s public colleges and universities.

That “extraordinarily long tax” is what especially worries me about this idea. First there are all kinds of administrative difficulties involved. But you’re also creating a situation where a graduate is stuck paying a certain amount of his salary over a certain number of years. At least with student loans there is a direct connection between what you get and what you pay, and you can pay off the loan early if you’re able to and move on with your life.

One thought on “The “shortsightedness” of “pay it forward” college financing

  1. Here are the comments I wrote in 2013 when I considered the Pay It Forward proposal. At the time I had not thought through the adverse selection issue – engineering students won’t sign up for it but art students will.

    http://www.rosshunter.info/2013/11/pay-it-forward/

    There isn’t enough money to fund this approach. If you had more money you would be better off spending it as student aid.

    Rep. Ross Hunter
    Chair, House Appropriations Committee

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