The Desert Lamp Headlines Could income-based student loans

Under a new proposal, this is how much psychology majors would pay for tuition

The idea of graduating college with no student loans probably sounds great for students who sacrifice sleep, nutrition, and drinking beer better than Keystone to make loan payments each month for much of their young lives. These crushing loans seem especially unfair to students whose investment in college don’t yield as comfortable salary returns as they may have hoped.

Students at The University of California-Riverside think they have a new solution to the increasingly dramatic cost of higher education. Instead of paying for school while undergraduates, a student group is appealing to California regents to allow students to pay for their education by paying 5% of their yearly income for the 20 years following their graduation.

These students deserve praise for making their own plans to combat the dramatic problems of the UC system. It’s also compelling to see the California regents engaging with students on these issues, as usually only suit-clad businessmen with well-established careers are included in discussions of tuition-setting and system finances. Drafting earnest proposals for alternative action is a far more admirable  call for change than performance art or sitting. But despite how hip and thick with zeitgeist this student proposal feels, it is not without problems.

Though most coverage of the proposal has claimed it’s a new movement, proposals for systems of this kind have been around for decades. There was even a report on the potential of a federal program for income-contingent student loans (ICL) by the Congressional Budget Office in 1994. Why didn’t the system gain traction over the current system of dispersing aid based (usually) on their parents’ income? While simple and seductive in theory, the ICL programs are not the economic fix-all they appear

While free college while one is earning a degree might seem great at first, if a school requires 5% of their income over 20 years, there is going to be a large range of what students actually end up paying:

Students who pay $2,500 a year – 5 percent of $50,000 – for 20 years, would end up paying $50,000 for their education, slightly more than the $48,768 they would pay over four years if UC tuition were frozen at its current level. On the other hand, students earning $100,000 would pay $5,000 a year, or $100,000 for their education over two decades.

As we see here, there is an adverse selection problem caused by ICR over time. Students generally interested in a career in business who know they will earn a healthy degree will find the school less appealing than before, while students interested in museum curator positions will be more intrigued in UC campuses that adopt the system. Even more broadly, students at the 75th percentile (more likely to earn more) will find the school less appealing, with the opposite result at the far end of the spectrum.

Starting a program like this on any significant scale is also a large-scale gamble that a system like UC in particular probably can’t afford. One of the most popular majors at UC-Riverside is psychology. Those who graduate with an undergraduate degree in psychology do not make anywhere near the $50,000 per year this proposal uses in calculations to prove its viability — probably closer to $25,000. Over 20 years at that rate, a graduate would pay only $25,000, a dramatic bargain, especially for a UC school. Even if psychology majors go to graduate school, it is many years before they earn an income vaguely comparable to an engineering or finance major.

As we see here, those who are likely to pursue low-income fields will be far more likely to enroll in an ICR-based school than a student who is confident their college investment will yield hearty rewards. There is also an interesting socio-economic dynamic that could be potentially persuasive here. High-achieving students who can get scholarships to pay for their undergraduate education while they complete their coursework are far less likely to attend a school that defers payments until after graduation, especially if they might end up paying more than the cost of tuition covered by their scholarships. This could lead to a university heavy with students who both have to take out loans to go to college and are more likely to pursue fields with lower salaries.

These students are right that higher education needs many, many changes, and UC regents are right to listen to innovative ideas, no matter their source. Perhaps most intriguing about this state-based ICL movement is the potential of this scheme to entirely supplant the federal student-loan regime. The student-loan regime’s powerful lobby has been the chief instrument in forcing federal policy. If UC is successful in implementing some version of ICL for its own system, it reaffirms state sovereignty of their own universities, and gets the federal government away from its intrusion into what would be better governed on a state-based level.

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