Reporters do not understand interest rates

[amicableskeptic]

I've been reading about Oregon's new Pay it Forward tuition plan.  The idea is to let students go to school without debt for tuition, and instead they just pay 3% of their salary back to the schools over the next 20 years.  I think this makes sense because it makes the cost of tuition much more in line with the actual value of your education (if your education helps you make more money then the schools get more money, if it doesn't then the schools get less).  There are definitely lots of details to be worked out though and I was reading a negative article that tried to go through them all http://www.theatlantic.com/business/archive/2013/07/oregons-very-radical-and-very-terrible-plan-to-make-college-tuition-free/277644  I think there are some good points in the article (particularly the point that this does not address room ad board costs), unfortunately the author of that article makes some points based on terrible understanding of math and the concept of value.  He states

"The average student is already asked to pay more than the value of their tuition over time."

Isn't the value of an education best measured by how much more money it makes you over a lifetime?  Wouldn't intrinsically linking the price to your salary over a lifetime make you the price for tuition much closer to the true value of a degree instead of the current one price fits all approach?

I also get annoyed when he posts some numbers trying to show why it will be a bad deal for students, when in reality the numbers show that it is an amazing deal.  He says:

"The average B.A. completing their degree today would pay an estimated $39,653 over a lifetime, more than $7,000 above the actual cost of tuition and fees." 

If you take out a loan for 32,653 over 20 years at 2.01% interest rate you would pay $7,028.79 in interest.  I think we can all agree that a 20 year fixed loan at 2.01% is actually an amazing deal.  And since he's dealing with average income and we understand that top heavy outliers push average salary well above the median we can feel assured that over 50% of students would get this deal or better.  Students who go on to earn more could see a rate nearer  The party really getting screwed in that deal is the school system which used to get 32K up front and now is having 39K strung across 2 decades.

Anyways, I'm still intrigued by the Oregon plan but couldn't help laughing at the poor math in this article.

[ncornilsen]

I was about to post a link to the same article! However, the people to be shamed here, in my opinion, are the oregon legislature for coming up with such a terrible idea. I suppose I should wait 'till the particulars are hashed out, but this just seams like another way of saddling me (the taxpayer) with the risk of increasing costs of attendance over the years, and decoupling people from making smart choices about thier majors.

And how much do you want to bet, alot of people will use thier student loan limits to live large and end up with the same amount of debt anyway?

[fiveoclockshadow]

And of course scaling to income makes it a progressive tax - a nice change given how much recent tax policy has trended to the regressive side.

But yes, the lack of basic math skills is sad.  Typical though, journalists also like to throw out big numbers with no context or reference point. Is 100M a lot?  They often never say and it takes some googling to find out.

[Joet]

also I'm sure an (unintended) side effect is the liberal arts/related/marginally employable degrees will be all for this plan , whereas engineering/finance/bus/etc would probably prefer to decline. So it might be a bit of a losers game for the university as only those that choose it will properly account for their future earnings potential. Then again---20 years is a long time. Perhaps a perverse side effect is similar to alimony--people minimize their incomes completely irrationally!

[cdub]

I think it's a rather horrid idea. They're going to garnish 3% of your wages for 20 years? No thanks.

[arebelspy]

I think it's a rather horrid idea. They're going to garnish 3% of your wages for 20 years? No thanks.

I only skimmed the article, but this could be an amazing deal for early retirees.

That is, what happens when your career is only 10 years long?

[marty998]

wages or income? If you are FI after 10 are they going to come after all your divs and rent?

Won't knock them for coming up with the idea. Sure it might be a bad one, but every bad idea can be tweaked to close loopholes. Just a question of how many loopholes you want to close.

[MrsPete]

I agree that reporters (or their writers) either don't grasp basic math . . . or they purposefully distort the numbers to make the situation more sensational for the public. 

Just for the record, the writer also seems to have missed some grammar lessons, pronouns to be specific. 

My thoughts on the concept:

- The college has to pay professors, repave the parking lot, keep the library stocked, etc. TODAY.  If you're promising to pay 3% of your tuition for 24 years in the future, that's all well and good . . . but how does the college meet its financial obligations TODAY? 

- I see so many loopholes here, and if I can come up with these in minutes, I'm sure the plan's proponents have considered them as well: 

I wouldn't think early retirees are numerous enough to be problematic, but what about people who don't work after graduation?  Suppose a woman works 3 years, then stays home with her kids for a decade.  If she returns to work, is she in year 14 of her repayment (because she's been out of college for 14 years) or is she in year 4 of her repayment (because it's her 4th year of employment)?

What about a person who cannot find work / becomes disabled and is unable to work?

Is this system like government student loans in that they can never be discharged? 

What about a person who leaves the country?  Within the US it's easy to "watch" someone's wages through the Social Security system, but what about a person who's not in the Social Security system?

What if I'm able to pay my tuition for my first two years . . . but then my college funds are depleted, and I decide to go on this plan.  Since I only borrowed for two years, do I owe the same 24 years (or the same 3%) as a person who took the money for all four years?  Similarly, what if I don't finish college, but I borrowed for one year?  Do I still owe the whole 3% even though I didn't take advantage of the entire program? 

- My daughter has a scholarship /loan that is not altogether different from this concept, but hers is much more workable:  She gets a small check for her freshman /sophomore year . . . and a rather large check for her junior /senior year . . . and when she's finished with school and is an RN, she is required to work in an "area of critical need" IN OUR STATE for each year she received the loan.  We investigated "areas of critical need" and learned that it's pretty much any hospital, especially the big city hospitals and late-night hours.  I have no doubt that she'll be offered multiple jobs once she's an RN, but if she is unable to work for some reason (goes to grad school, surprise twins, whatever), she can apply for a deferment for X number of years -- and then she's forced to repay in cash, regardless of her reasons.  Oh, and she'll earn a full salary while she's working.  The program she's in seems much more fair to the student -- a four year commitment vs. a 24 year commitment -- and much better defined by the state. 

- I was talking to a friend from England about their student loan program (unfortunately, it's been months ago, and the details are fuzzy in my mind), and he described something very similar, though it's a government program, not just one state -- but he also said that the program is unsustainable, and he expects it won't last.  Why?  For just the very reasons that're being discussed here. 

- If the college can make this work, I'm not opposed to it.  Remember, this is being offered as A CHOICE.  No one's saying that you can't write a check for your tuition.  No one's saying that other loan sources will disappear.  I'm all for choices -- provided all the gory details are rattled out so the student /parents can make a good decision. 

[mpbaker22]

There's a private version of this in existence.  I saw it on an MBA page.  I can't find it now, but if you use the google machine long enough, it's out there.

[amicableskeptic]

@ncornilsen

another way of saddling me (the taxpayer) with the risk of increasing costs of attendance over the years, and decoupling people from making smart choices about thier majors.

@MrsPete

how does the college meet its financial obligations TODAY? 

The proposal calls for using tax dollars to meet financial obligations today and then phasing that down over time till the repayments have built up enough to carry the institution.  This is definitely a cost to the taxpayers, but public universities themselves are a cost.  I see a program like this as something that could decouple the taxpayer from the risk of increasing costs of attendance over the years.  The way I'd like to see this legislation work is for it to be explicit about phaseout of other tax dollars basically making the extra money put in now an investment against putting more tax dollars in in the future.  They could even go so far as to finance the up front money with long term bonds in order to spread more of that cost onto the actual recipients of the payout, but maybe that is going too far.

I also think NCornilson is making a mistake when he says "smart choices about their majors".  A student will likely earn more money out of the gate with an engineering degree, but there is a lot of change for non-engineers to win out in the long run.  Also I would think the costs of liberal arts degrees would be much lower than engineering degrees because they do not need to pay for big expensive labs and the stuff that goes into them.  I'd like to see the payout based on the actual graduates from your own school instead of being one big pool.  Then savvy college administrators would tune the costs of their various majors to the expected return that major would get the school.  So if a liberal arts major on average earned 1/2 what an engineering major earned the school would try and ensure that it cost 1/2 to educate them.  This would better align the costs and benefits of majors.

@MrsPete

What about a person who cannot find work / becomes disabled and is unable to work?

I think this is one of the key benefits of this plan.  With the current inescapable student loans (not even bankruptcy can get you out of them) falling on hard times like this is just devastating.  With an income based repayment plan you would not be as crushed if bad things happen.  This lets people take more risks with their careers (like starting a business) which seems like a mustachian goal.

What about a person who leaves the country?

As for avoiding repayment by leaving the country, I feel like that is possible with loans too right?  If you want to be a scoundrel and are willing to flee the country to do so it is certainly possible.  I think that the bulk of students would understand that they bought into this and honestly repay (just look at how many donate to their universities after they graduate with no legal requirement to do so).  Sure there would be outliers, but there are outliers already.

Remember, this is being offered as A CHOICE.

Sort of.  I think the proposal eventually calls for 100% of Oregon state schools to adopt this.  The choice would be "Do I go to an Oregon state school or not" with all Oregon state schools being paid for this way.

Thinking about this more and more, I think what I really want is for schools to switch to this sort of repayment plan individually.  Schools like Yale that have used their endowments to replace loans with grants are sort of already there, but they're just hoping for donations in the future to replace the lost tuition instead of writing up a contract requiring them.  I feel like having schools get paid commensurate with what their graduates make just makes so much sense as it prices education based on the true value it is providing.  They often rank schools on ROI, and doing it this way would provide a much more guaranteed ROI as the investment shrinks and grows with the size of the return.  Maybe this Oregon proposal won't work, but there's got to be some way to make this happen.