A Bold Idea
Ten thousand dollars a year for college. It sounds like one of those campaign promises that are good on the stump but too expensive once the candidate is elected. But Howard Dean's latest announcement is not only eminently do-able, it is a breakthrough for an idea that has been germinating in both conservative and liberal camps for almost 50 years.
Here's how it works. The federal government reaches agreements with states to ensure that current government scholarship programs, strengthened, will allow the vast majority of students to attend at least the first two years of college without a lot of debt. To the extent that their costs aren't covered, up to $10,000 in federal loans would be available to fill out the package.
Usually the expansion of potentially crippling loan aid would not be met with cheers. But this expansion comes with protection that reduces the downside risks: any loan payments that exceed 10 percent of borrowers' incomes would be refunded through a tax credit, allowing them to fully repay their loans after working for 10 years.
The idea of connecting student loan repayment to income after graduation is not new. Conservative economist Milton Friedman first suggested the idea in 1955. Since then, Senator Ted Kennedy, President Ronald Reagan, President Bill Clinton and economists at the liberal Economic Policy Institute have all proposed variations on the theme. But their proposals suffered from a variety of flaws. Some attempted to extract extra large payments from high-income borrowers in order to subsidize the low-income borrowers. Some didn't have a good system for confirming the income of borrowers. And others reduced payments by stretching the loan out for 25 years, so borrowers would still be making payments when their own kids start college.
They failed to recognize that in order to work well, the system needs to subsidize lower-income borrowers without penalizing everyone else. Buried in a recent book by UCLA economist Tom Kane was a suggestion: why not replace President Clinton's college tax credits with refundable credits that help pay off student loans? Working with Kane, I have estimated that the cost of a 10 percent limit like Dean's would be about the same as the Clinton tax credits.
The Dean campaign isn't touching the Clinton tax credits, though. In fact, one of the benefits of the Dean proposal is that it simplifies the whole system without upsetting the political compromises that created the current mess of a financial aid system. It doesn't change borrower benefits or repayment options. It is agnostic about whether the loans should be guaranteed through banks or made through the cheaper direct loan program. In other words, the proposal doesn't start by creating a whole lot of enemies.
Public investments in higher education have long been a conundrum for economists. Earning a college degree is a huge financial boon, resulting in an average of one million dollars in additional lifetime earnings. So it makes perfect sense for individuals to put time, energy and money into their own education beyond high school. But when they need the money is not when they have it. So how can people get an "advance" on the future earnings that are likely to come from further education?
For more than 40 years, part of the answer has been the federal student loan program, which at $48 billion last year provided nearly half of the college financial aid available in the country. But the people who could most benefit from college are understandably worried about racking up a whole lot of debt, fearful that the education won't bring the financial rewards that they hoped for. By ensuring that the repayment burden will not be excessive, that fear is reduced, opening the way for more people to further their education, to their own benefit and the benefit of the U.S. economy.
Will this lead to tuition increases? There is no reason to think so. The availability of loans does not make cars more expensive, it just makes them more affordable. In the same way, students will still be price sensitive, because the loans are not free. The higher the tuition, the more loans, work, or savings they will need to tap into. Tuition may continue to rise, but this won't be the cause.
For too long, discussions in Congress about college aid have been focused on providing a few hundred dollars here or there. It is time to start talking about real money, in ways that will send a message to all students that college is attainable -- especially for those in urban centers where dreams of college fade fast in the face of mounting tuition or student loan bills.
