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An alternative funding model to support higher ed excellence

Andrew Szeri

Cuts in state support and the subsequent increases in fees are leading many students to take out loans. This is very regrettable. Maybe there are other ideas that should be considered carefully, like the following.

In a classic paper by the Nobel prize-winning economist Milton Friedman (“The Role of Government in Education.” From Economics and the Public Interest, ed. Robert A. Solo, Rutgers University Press, 1955), he made the argument that fixed money loans are an inappropriate way to fund a higher education. He argued that an alternative device would be to “…’buy’ a share in an individual’s earning prospects: to advance him the funds needed to finance his training on condition that he agree to pay the lender a specified fraction of his future earnings. In this way, a lender would get back more than his initial investment from relatively successful individuals, which would compensate for the failure to recoup his original investment from the unsuccessful.”

Friedman imagined that a governmental body would be the investor who “buys” the share. (Robert Reich, my distinguished fellow Berkeley blogger, floated a similar idea at a hearing of the UC Commission on the Future–see the LA Times article–but with the University as the ‘investor’.) But Friedman concludes the reason why things do not happen this way is because administrative costs would be too high, and collecting the funds too difficult to do. Instead, in the same article Friedman writes a compelling case for income-contingent loans, where one repays at a rate according to one’s means. These are common in other countries, and the idea is gaining traction here. In a recent article, Eliot Spitzer argued, “The IRS can serve as the collection agency [of income-contingent loans], making enforcement almost universal and driving costs down to a negligible level.”

So here is a modest, practical suggestion, which draws these threads together: enlist the aid of the IRS to collect contributions from alumni in lieu of tuition/fees from students. The federal government would have to make a very far-reaching change to the tax law. The change would allow an individual to enter into a contract with an IRS-approved entity, whereby the individual agrees to forgo a future fraction of his or her earnings (say, adjusted gross income) in return for something of perceived value. There might be lower and/or upper limits on AGI that could be used in the calculation. Once the tax law allows such voluntary contracts, entities approved by the IRS can be set up as the beneficiaries of monies collected through this add-on to the tax system. These could be colleges and universities, for example, who would enter into contracts where the provision of some or all of an education is exchanged for a fraction of the student’s future earnings, perhaps over some finite time. Other types of beneficiaries approved by the IRS for voluntary contracts might be churches, or other charities.

Pros

  1. If many people chose contributing-as-alumni over paying-as-you-go, university finances would be much more stable in the long term.
  2. Individuals from modest means could choose to contribute as alumni in lieu of paying fees/tuition as students, thus enabling social mobility.
  3. The collection of funds would be extremely efficient, as it is transacted through the income tax return.
  4. The concept of contributing as alumni fits some peoples’ views that higher education—and certainly (in their view) graduate or professional school (Friedman 1955)—is a private good, and so should be financed in a manner consistent with that notion.

Cons

  1. Perhaps the idea of paying as alumni is too close to indentured servitude. (But then the individual gains from his or her education for many years…)
  2. Individuals who do their education and plan to pay as alumni and then resign their citizenship and move to another country could escape repayment. (Surely, this would not apply to many individuals.) Of course, the idea likely does not work for all, such as non-citizens.
  3. The changeover to this funding mechanism for many students would have to be managed carefully to ensure adequate cash flow to meet expenses during the transition.

I think this idea–and I am sure there are many others–should be investigated as a longer-term alternative to the way University educations are funded. What is really behind this idea is partly replacing the now-frayed social contract that has long existed between the taxpayers of the California and the students at UC with a different social contract, between the students and alumni. See the thought-provoking Chapter 9 of D. Meyers, Immigrants and boomers: forging a new social contract for the future of America, Russell Sage Foundation, 2007. (Thanks to my colleague Andrew K. Smith for pointing me to this source, and to another colleague Moira Perez for drawing my attention to the LA Times article mentioned above.)

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Comments to "An alternative funding model to support higher ed excellence":
    • A

      In the proposed scheme, the children of the rich would pay tuition while in school, and thus have later the advantage of not having to pay a percentage of their future earnings for this scheme; this ‘locks in’ a lower effective tax rate for them, forever. And in the current U.S. society, the children of the rich are more likely to be among those earning outsized incomes after college[*], so very big incomes are more likely to escape contributing a fraction to higher education. Then the fraction paid by just slightly bigger than average incomes has to increase…(as in the ‘death spiral’ of health insurance without individual mandate).

      So the advantage of having wealthy parents, who can pay current tuition, will carry over to the next generation, to the same or larger extent than it does today.

      The only way to avoid this problem is to make this scheme of financing higher education compulsory, and that’s about the same as having a truly progressive income tax.

      [*]After all, most of the 0.1% got there the American way, by inheriting their wealth; next are people in real-estate or other financial speculation; the Bill Gates-type entrepreneurs and sports/music stars rising from modest backgrounds are a very small minority receiving outsized publicity.

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    • Mike Viehman

      Why not finacnce EVERYTHING, ie ALL taxes like this, BUT only for 20yrs, max!! That way whne a career starts out, it won’t be influenced unduly by
      estimated return, only talent & interest. Most all of a persons tax burden
      would be covered before they reach 50, leaving a successful period to
      fund thier own retirement ?!?

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    • yinka asha

      Government has been responsible for financing university education since inception. In Nigeria, like many African countries, the government has not been able to continue with the level of investment in university education that it began with an early year. These are a number of reasons that negatively affected levels of public expenditure on education in Nigeria. The most prominent are general economic recession, growing populations exerting new and expanded demands on the government, debt burden and structural adjustment programmes that led government to introduce policy shifts in all social sectors.
      In Nigeria, the Federal Government maintains a policy of no tuition fees in federal universities while at the same time allowing students enrolled in state universities to pay tuition fees in addition to room and board. In May 2002, the Federal Government issued an order “forbidding” the charging of tuition fees at all 24 federal universities as these universities were contemplating charging tuition fees as a cost recovery strategy. The Government believes that it has a duty to provide qualified Nigerians with free university education. Before this presidential decree, federal universities intended to charge a tuition fee ranging from US$ 200-400 per semester. [3] (See The Higher Education Chronicle, Tuesday May 28, 2002).
      The Government through the National Universities Commission makes it mandatory for all federal universities to generate 10 percent of their total yearly funds internally through various revenue diversification mean

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    • Damian

      This is interesting, but it doesn’t sound all that different from private education where the funding model is part tuition, part alumni donations. In their case, of course, alumni donations are voluntary, but still based on means (I give 20 now, expect to give more later because I was generously given to when I attended). Our 2003 class at Carleton was notable in the 5 year reunion because we achieved something like 53% giving. It’s not everyone, but I like the idea of a voluntary system rather than a forced one.

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    • At a time when models being debated are either the the existing system of state funding plus tuition plus loans, or moving towards a private university model (with an unavoidable narrowing of access), we need to try to imagine entirely new models. From an anthropological perspective, the prospect of creating an on-going community that binds alumni and current students makes a great deal of sense, as it builds on already existing forms of loyalty and identification. And in terms of values, this proposal has the notable advantage of restoring the promise that higher education would not be denied to qualified and eager minds due to financial situation.

      It also goes a long way to moving us away from the further commoditization of education as a product to seeing learning as a relationship– even if it is framed in the language of investment.

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