Oregon legislators are proposing to let students in the state attend college for free, in exchange for a share of their future income. Longtime twitter correspondent Professor Tony Lima explains why this won’t work:
Following Prof. Akerlof’s lead, assume there are two types of students. One type (S) majors in art, English composition, history, and ethnic studies. The other (H) majors in mathematics, hard science, engineering, or even economics. While type S individuals may not know it, their major will, on average, result in lower lifetime income than those in group H. Type S individuals will happily accept Oregon’s offer since three percent of their income over 20 years is a good deal. Type H individuals, however, are likely to think that three percent of their income is a high price to pay. They will seek alternative methods of financing their education, paying the standard tuition and fees. (This proposal could, in fact, revive the private student loan market — but without government intervention.)
Result: Oregon will collect far less than they are predicting. The percentage of income will rise and the duration of the loan will also increase — to 25 years, then 30 years. And, just as Prof. Akerlof predicted decades ago, the scheme will eventually collapse.
There’s a related problem: once people have gotten the education, they have a strong incentive to structure their lives around lower compensation (which the state gets a cut of) and more of other enjoyable things. Take the job that pays less, but offers fewer hours, longer vacations, or more attractive office amenities. Do something personally rewarding but financially unremunerative. Note: there’s nothing wrong with those choices; I myself chose to use my MBA to become a journalist. But I still repaid my (gigantic) student loans. You don’t want to give people incentives to follow their bliss on the taxpayer dime.
Overall, this scheme seems very unlikely to work, unless the annual payment is so low that it won’t affect student behavior–in which case, it will also be so low that it won’t cover the cost of the education. In today’s fiscal environment, I don’t see that this has great prospects.