Malinvestment starts the same every, single, time. Over extending credit to unworthy investments. Usually this is done through the government because their primary objective is not to make money, but to appease voters. Sometimes this is done by financial institutions that offload the risk to someone else and make their profit on fees, or commissions (but never negative commissions).
Here is why this is a bad idea: There are no price signals to the potential students to help guide them to the correct career choice. In Ontario the things you can get bank loans for are the following: STEM, Medical fields, Economics, Accounting (both of which are kinda STEM-y).
The government interferes here, by paying the first 75% of the cost and by creating loans for the poor and almost middle class, but at the very least a good number of us have to work some amount to pay for degrees that don't pay for themselves.
Another reason it is a bad idea: It means that universities no longer have to compete on price, they compete on marketing.
As an aside: There is this general trend that I've noticed. The baby boomers load up the country or state with debt or equivalent (like defined benefits, or entitlements) but because the state can no longer handle increased debt loads they do not afford the same ponzi scheme to Gen-[x-z]. They load us up with 3% for 24 years on your income on top of the debt that we're going to have to pay for. Also, how the hell does the majority of the western world go into debt during a period where the largest bubble of the population is at their peak earning potential? This is crazy, we couldn't afford largesses then, and we certainly won't be able to when they retire, and we also have to service the debt, and we also have to deal with longer lifespans, and we also have to deal with 3% on our malinvested education subsidies.
What's going to compel this generation to stay saddled with this debt? If we don't vote it (or spending on seniors) out we'll just move out of the country. Have Macbook, will travel.
Bad debt is a good point, and it comes down to the loan provider agreeing on what they will and will not pay for. In below references to the Australian system you'll find that the load provider (the government) will at times stop providing funding for industries, or limit the number of funded positions (you still have the option to go at as a full-fee paying student) when there is less of a need.
A great example of this would be teachers, there are limited positions as there are a lot already and new positions do not open up as rapidly as universities can train teachers. A great way to control this and push people in other directions is to simply not fund that degree to the same extend as say various engineering courses.
Don't be afraid of it just because the government is involved. It can, and has worked. There is a lot to gain from having an educated society.
Yes, this is a horrible idea that sounds like a good idea, which makes it all the more horrible.
People who graduate from college have a significant wage premium over people who don't. Over the past generation schools have figured out how to grab more and more of that wage premium for themselves, sometimes more than 100% of premium for certain students.
Now we're trying to make it even easier for them to capture exactly how much of that they decide they deserve. And having the IRS enforce it.
Fortunately it's only a pilot program. While I doubt it will happen, it's conceivable that they will realize these flaws and make regulatory adjustments accordingly.
They make reference to the Australian scheme in the article. Student loans in Aus are indexed by inflation (consumer price index) so they maintain their real value so as long as wages keep up with inflation it is effectively interest free and a graduate salary really should do better than just keep up. The money is collected via the tax system beyond a typical graduate salary. You hit hard times and drop below the threshold it just accumulates. Just about the next best thing to actual free government education. This is the historical indexation for the Australian scheme http://www.ato.gov.au/Rates/HELP-indexation-rates/?default=&... and http://www.ato.gov.au/Rates/HELP-indexation-rates/?default=&...
> The money is collected via the tax system beyond a typical graduate salary.
It's worth noting if you are not earning over a certain threshold (currently $51,309), you don't have to pay anything. If you want to go travelling, you simply don't pay anything. If you never earn that much (because, say, you work for a non-profit or are a struggling artist), you are never required pay it back.
Also, if you leave Australia, you never have to pay it back.
If you do earn over that threshold, you just pay slightly higher income tax in those years [1]
If you make a voluntary payment of $500 or more, they take your payment plus another 5% off. [2]
I personally have found it to be a phenomenal system, and I've never met anyone in Australia that didn't go to University because they couldn't afford it. (We also get paid a "living wage" to go to University, of around $400 every two weeks, depending on circumstances. [3] )
If you can make the entrance requirements everyone has a chance to study without the penalty of crippling debt, most of us reach legal drinking age during our first year of study and our campuses rarely get shot up by gun toting crazies. Freedom is a relative concept I guess.
Australia's system is amazing. I would be in crippling debt if I had studied in many other countries but instead I am slowly paying back the debt and barely noticing the hit.
I'm so glad this is getting some attention. It is an amazing system and while a bunch of issues like people leaving etc are pointed out, for the most part "what goes around comes around" but in a very positive way for the nation.
People feeling free to travel and experiment, while being educated, just means eventually when they return home they bring a lot back with them. You wonder why a nation in the middle of nowhere can thrive? Well yes there is a mining boom, but also the country is well equip enough to make the most of it.
This would be a great idea if the schools had some skin in the game too. I would adjust the plan to have schools not get paid right away. The schools income will also depend on future earnings of the student.
As govt makes it easier for students to attend school, though guaranteed loans and plans such as these, schools raise their prices to suck up the benefit instead of allowing the benefit to go to the student. Also, some schools lower their qualifications for attending and graduating. They dont care if you're educated because they have a guarenteed payment from you and the govt, regardless of how well they educated you.
With a fix percentage of salary, the school has an interest in getting you educated so you can pay them back with a good high paying job. They can only earn more money if they make you a better educated student.
One of the key parts of this is extending it across 24 years. To simplify the math, let's assume a graduate gets a job paying $30,000/yr, and annual payraises of 3%:
This does not factor in interest on the original loan. $1,776 in year 24 is not worth $1,776 today, it's worth considerably less[1].
Here's a breakdown at a couple of different interest rates of $1,776 in year 24 in today's dollars using annual compounding (it'd be a bit more lopsided using monthly):
To do this calculation correctly either the future payments need to be converted into today's dollars or interest on the original loan needs to added to it (i.e. calc in future dollars).
But we want the present value, the value in 2013 dollars. That calculation is much easier, because you can assume inflation = pay raise and it cancels out. PV = $900*24 = 21600.
This is the calculation for someone who got a bad job and never advances at all in 24 years. It might be a good deal for them. On the other hand, they could make that without going to college. Someone successful would make significantly more, and pay significantly more.
This program will get a lot of stay at home moms out of paying for their psych degrees.
Inflation, or cost of living raise imply's that you are simply doing the same entry level job for 24 years and you never ever got a real raise. Never got a single promotion, or moved companies to a better job. And started at a below average wage. Of course this is a good deal for that person.
If you want to be that person, you should totally support this plan or one like it. However, if you'd prefer to be even a little bit successful, this plan doesn't turn out as good. The math works quite differently if you start out at a better wage, as I imagine most people on HN did. It also works differently if you ever get a promotion in 24 years.
It will lose money on the median student but what matters is mean performance (expectancy).
That's not to say that I think this is a good idea, but there's plenty of precedent (including VC) for investments where the median loses but the mean is positive, because the big wins cancel out the losses.
The thing i like about this the most is that worthless degrees are free and usefull are expensive. So it's in the college's best interest to offer quality.
Most likely the way this will work in practice is that the Oregon government pays colleges up front on a per-student basis, and then calls the program "revenue neutral" based on predictions of what they will later pay.
If one was to pay 3% of ones salaries annually for 24 years how is "salary" defined in the US?
Wouldn't a lot of people start demanding "perks" like free cars, food and housing in exchange for lover monetary pay? Wouldn't this possibly undermine the fund as the ones with the higher salaries are in a better position of negotiating these deals?
>Wouldn't a lot of people start demanding "perks" like free cars, food and housing in exchange for lover monetary pay? Wouldn't this possibly undermine the fund as the ones with the higher salaries are in a better position of negotiating these deals?
This is already happening to avoid the income tax.
> This is already happening to avoid the income tax.
That's tax fraud. Call the IRS and turn in whoever is doing this; you will get a portion of the misreported funds as a bounty.
It used to be that stuff like company cars didn't count as income. That was back when we had income tax rates of 70% and 90%. It was trivial to avoid those taxes for a dozen reasons, once being that compensation that wasn't cash was not taxed.
Now, any kind of compensation [1] is taxed as income.
[1] except health care, for no good economic reason.
This article[1] states that food, for example, is a tax free perk. Additionally, I didn't specifically talk about the American tax code. It's a global phenomenon.
The company has to pay taxes on them already as most perks as considered compensation (except for a narrow class of business expenses, and health care). If the 3% was applied there it could avoid this issue.
In Aus (and UK, I believe) you can "salary sacrifice" something like a car, phone, or computer. Essentially the employer buys it for you and just deducts payments from your paycheck towards it. It isn't income to you, but there is a fringe benefits tax. Some items, like computers and phones, are exempt from this tax though.
As far as I know the only thing that works this way in the UK - there is as scheme where you can get a bicycle tax free and paid by deductions from your salary:
That has happened here in Norway. One normally get so heavily taxed when receiving a perk that it is normally give more economic sense to pay out of your own pocket instead.
As a result very few have any real perks, except free cell phone. At list it makes it easier to compare job offers :)
I'd imagine they'd use AGI. The IRS already goes to great lengths to precisely define income to avoid trickery like that. E.g. employer provided housing is generally considered taxable income. Food is taxable income except for certain subsidized cafeteria plans.
They are basing this on very conservative starting salary of less than 30K. It would be very hard to ask for any perks such as free housing or company car at this level of pay.
What happens if the graduate moves out of Oregon? Who enforces collection?
Frankly I think this idea is silly. The primary reason that the cost of education is out of control is that so many people are not using their own money to pay for it. In trying to make education affordable to everyone, we've achieved just the opposite. Universities are bloated, top-heavy with highly paid administrators and staff who actually do very little work, and they can afford it because they can just increase tuition by near double-digit percentages every few years and get no market pushback.
I very much agree with you. As much as I appreciate the idea of everyone going to college, I think the idea of making loans easy for anyone to go to college has been a huge disservice to a lot of people. Students don't view the money as "real", they simply view it as a free pass to go to the "best" (i.e. most expensive) college. Universities know that students can get loans to cover their costs, so they raise the costs as fast as they can. Also deserving some blame are parents who don't spend enough time really working with their kids to remind them that a $50k/yr loan, WITH INTEREST, is going to be insanely hard to pay back.
But ultimately universities are going to raise tuition as high as they can because they know that students can get loans very, very easily.
So how do you explain wait lists? If your theories about how tuition is set were correct, wouldn't we expect universities to set the price high enough to eliminate wait lists?
Look at the "Repayment" section. Essentially until you're earning money, you don't need to worry about the loan and it only goes up by the current inflation rate. Good incentive for the government to ensure there are jobs and means people don't just take the first crappy position that is thrown their way when they finish their degree.
I honestly dont think the structure at has been generated in the US will work as it stands today. There are a lot of edge cases they're not discussing, i.e. if people move to another state how do they track it? If people leave the country? I know a bunch of issues like these, that took a while to iron out in Australia that will likely take a while in the US too. I hope it doesn't get thrown away before it gets the chance to settle in.
It's interesting to compare this to the pre-paid fixed-price education plans that several states did ~20 years ago, with mixed results. You buy in when your kids are children, and are guaranteed tuition will be covered when they are college aged. Some programs have had trouble staying balanced though.
This whole thing feels wrong to me. The market for education seems upside down. Education is fastly becoming less about just getting a general education, and more as a step to achieving a career. I think a very solid case can be made that a more educated workforce benefits industry as much if not more than it benefits the employees themselves. I also think we're missing out on the benefits of well placed pricing dynamics.
Today, most of the decisions are made by the students themselves. By definition a student does not know anything about the future of the industry they're entering other than possibly an article they read in a news paper. What you end up getting are disproportionate classes of students in programs. On the surface it sounds great. In America I can go to school for whatever I want. Of course when you graduate there's only demand for 10% of the people in the program, and if you aren't in the top 10% of people in your program IN THE COUNTRY, you're not going to get a job in that industry anyways. Plus you now have a boatload of debt, which you took on for essentially the privilege of knowing how to do work to benefit your future employer.
I think things would be improved with a few small changes. Break up the private and public sectors into specific industry categories. Create non profit organizations to help with predicting future demand, and curriculum, then have colleges bid on fulfilling it. I think it does two things. It allows for consistent standards to evolve (so if for-profit institutions bid, they have to prove they are providing a quality education... today they don't for the most part) second I would assume these organizations would be better at negotiating then individual students would be, which I think would become a big deal as businesses are usually pretty smart at finding ways to pay less taxes... and if they're paying 100% of the bill for education, they're going to look out for bad pricing.
At some point the generation that we are currently screwing over for higher education is going to get into power. If they cancel all social security payments and tell old people (e.g. the boomers) to pay their own way or eat dog food, they will be complete justified.
Am I the only one reading most of these comments and thinking that everyone has completely missed the point? That paying back student loans as a percentage of income instantly relieves the crushing burden of paying back a fixed dollar amount per month?
Hasn't anyone else put off starting their own business because even a few hundred dollars a month severely impacted their burn rate? I still owe over $8000 even though I graduated from college in 1999. I could write a check for that today, but there was a period in the early 2000s where I was so destitute that my student loan payment was more than my rent! I would literally be living a different life today if the proposed repayment plan had been mainstream when I graduated. I can't even imagine the ramifications of that, times a million other entrepreneurs. Where has our vision gone?
The "higher education" system as it exists now is just pure exploitation, and decimating the middle class.
Allow current student loan holders to enter bankruptcy like normal human beings, and have all future financing be a small set cut of future earnings.
Focus much more energy on apprenticing programs like in Germany, where kids actually get real job experience instead of sitting in a classroom with 150 other kids while some 28 year old associate professor walks through a powerpoint presentation.
I mean, the basic problem is that corporate America doesn't really need as much labor input anymore. But we have an entire generation of young Americans who pay more on the "education" loans than their rents. That's a complete injustice.
There's a reason bankruptcy doesn't discharge government student loans: congress amended the bankruptcy laws in 1978. Why? Reports of abuse from doctors, lawyers, and other high earners that racked up massive debts and declared bankruptcy immediately after graduation.
People with $100,000+ in student loans are the 3%.
Overall, as a person who has enjoyed the generational advantages provided by accessible college educations, I think this plan is a Rawlsian good.
Of course, it has its flaws, such as repayment being tied to salary rather than income - and how does this work for a married couple from a tax perspective? Expect the percentages to increase and repayment to become increasingly regressive. I doubt it will curb the administrative bloat and sports subsidies and student amenities which have driven costs upward.
But at least it is a start. Schools are our greatest incubators and replicators of beneficial memes.
Probably my UK bias showing - we have separate income and capital-gains taxes so I am used to thinking of them as different things although, as you point out, they are both "income".
If you have the option of paying a percentage or a flat fee, it would seem like those with an expectation of high future earnings would always take the up-front cost, leaving you with a much smaller pool of students. Once you near the end of that 24 year period, I'd also expect to see a lot of deferred compensation schemes amongst high earners.
"Adverse selection" was mentioned in the article. Going into a lucrative career? Self-fund. Want to learn something that will never pay you a decent wage? Sign up!
What you end up with is a bankrupt system program in a decade or so.
Or, more or less equivalently, one could tax the population at 3% of income, and fund a free education system. It slightly disadvantages those without degrees, but I'd argue there are enough positive externalities that they still come out ahead.
This is a horrible idea. Removing the financial barriers to college will get kids who shouldn't be going to go anyway without thinking about it.
I don't think education should cost an arm and a leg but you should have to think about it as your money. Which, IME, a lot of kids going to uni don't under a deferred payment system (a similar thing is currently operating in the UK - though there it's based on repayment of the loan against the ... I believe... consumer prices index.)
Honestly, I almost think that university is a bad idea altogether for many people these days. If a company wants a trained workforce they should be the ones paying. Seems the wrong way around at the moment. The kids have to take on all the financial risk themselves - but at a significant information and power disadvantage.
No, I think university fails in numerous areas and business is the strongest remaining one - in effect its ties to certificates that industry might value is what university has left. Few would be able to justify to themselves going there otherwise.
If you want a well rounded general education, you're - by and large - best off providing it for yourself if you don't need someone to stick a rubber stamp on it for you.
A state government is actually diverse enough in needs to create a full market for these options; it wouldn't have to sell/transfer them on a secondary market to profit.
Malinvestment starts the same every, single, time. Over extending credit to unworthy investments. Usually this is done through the government because their primary objective is not to make money, but to appease voters. Sometimes this is done by financial institutions that offload the risk to someone else and make their profit on fees, or commissions (but never negative commissions).
Here is why this is a bad idea: There are no price signals to the potential students to help guide them to the correct career choice. In Ontario the things you can get bank loans for are the following: STEM, Medical fields, Economics, Accounting (both of which are kinda STEM-y).
The government interferes here, by paying the first 75% of the cost and by creating loans for the poor and almost middle class, but at the very least a good number of us have to work some amount to pay for degrees that don't pay for themselves.
Another reason it is a bad idea: It means that universities no longer have to compete on price, they compete on marketing.
As an aside: There is this general trend that I've noticed. The baby boomers load up the country or state with debt or equivalent (like defined benefits, or entitlements) but because the state can no longer handle increased debt loads they do not afford the same ponzi scheme to Gen-[x-z]. They load us up with 3% for 24 years on your income on top of the debt that we're going to have to pay for. Also, how the hell does the majority of the western world go into debt during a period where the largest bubble of the population is at their peak earning potential? This is crazy, we couldn't afford largesses then, and we certainly won't be able to when they retire, and we also have to service the debt, and we also have to deal with longer lifespans, and we also have to deal with 3% on our malinvested education subsidies.
What's going to compel this generation to stay saddled with this debt? If we don't vote it (or spending on seniors) out we'll just move out of the country. Have Macbook, will travel.