Wednesday, April 15, 2015

Should States “Pay It Forward” for Higher Education?

New models of funding higher education are currently being considered in debates throughout America. One recent debate concerns funding through “Pay It Forward” (PIF) programs. Since 2013, at least 24 states have considered legislation on PIF models of higher education finance. While details differ, the rapid proliferation of PIF program proposals shows a willingness to move from the current system of upfront payment to an income-based system of payment after leaving college.

What are “Pay It Forward” programs?
The National Association for College Admissions Counseling (NACAC) has put together a map of states in which PIF legislation has been introduced or passed. According to NACAC, 22 states have considered PIF legislation, while a more recent report by the Illinois Student Assistance Commission notes that at least 24 states have considered such proposals. Some states (like Ohio) define PIF as a deferred tuition plan, in which students would pay for college upon departure (not entry) from an institution. Other states (like Florida) defined PIF as an income share agreement, in which students would pay a portion of their income upon separation from a higher education institution.

What is deferred tuition?
Deferred tuition systems are higher education finance systems in which students do not pay for their higher education at the time of enrollment (upfront), but rather pay on the back end once they leave college. These systems delay higher education payments until the time that students enter the workforce and eliminate upfront tuition payments. By allowing students to delay payments, there is a change in the expectation of which generation pays for college. Under an upfront tuition system, it is assumed that parental resources would be used to pay for college. However, under a PIF plan the expectation is that students would pay for college themselves. Students are best able to do this once they enter the workforce following their post-secondary education. As such, payments are due, not at the time of matriculation, but at a time when students have earnings.
Deferred tuition programs have been used with in the past in the US. For instance, Yale University conducted an experiment in the 1970s and students at the University of California at Riverside proposed a similar model in 2012. Globally a number of nations use a higher education financing system in which payments for the price of education are deferred until after a student leaves college. D. Bruce Johnstone and Pamela N. Marcucci in their 2010 book categorize Australia, England, Ethiopia, Lesotho, Namibia, New Zealand, Rwanda, Swaziland, Tanzania, and Wales as nations that use deferred tuition systems.

What are income-share agreements?
The deferred tuition approach characterized in the discussion above requires each student to pay the full cost of her education (adjusted for any upfront subsidy or student aid). In contrast, an “income share” approach to higher education finance dispenses (at least in part) with the notion of a student-specific tuition amount. Instead, a special tax – sometimes referred to as a “graduate tax” – is imposed on students after they leave college. This tax is used to finance the cost of education received. However, there is no specific link between the cost of a particular student’s education and the amount paid under this tax. Instead, the tax depends on income following college, such that students would be required to pay some percentage of their income (say 3%) for a set amount of time following graduation (say 25 years). Under this scheme it is possible that high-earners could pay more than the total cost of their education and low-earners would pay less than the total cost of their education.
A number of companies have developed private income share agreements. Some provide broad income share investments that can be tied to higher education such as Upstart, Pave, and Cumulus Funding. Others, like the companies Lumni and 13th Avenue, provide funding only for students to attend higher education.

Where could someone find out more about “Pay It Forward” models?

I currently have a working paper on PIF programs with Dhammika Dharmapala from the University of Chicago. The paper develops a theoretical model of PIF programs. The results show that college access is enhanced by PIF policies. The equilibrium level of subsidies for higher education depends crucially on the pattern of income distribution and the extent to which higher education either increases or decreases income stratification (the difference between mean and median income). We show that the equilibrium level of subsidies to higher education will not necessarily decline under PIF, and may increase in some equilibria due to changes in college access for low income groups. Our work highlights important increases in college access that can be achieved with deferred tuition systems. We are considerably more wary of income share programs that are not as clearly beneficial to college access, and raise moral and ethical concerns.

by Jennifer Delaney

Jennifer A. Delaney, Ph.D., is an Assistant Professor in the Department of Education Policy, Organization and Leadership at the University of Illinois at Urbana-Champaign. She specializes in higher education finance and policy; particularly state funding of higher education.

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