What if colleges were at risk for costs?

The following appears on page 81 of Equality and Efficiency: The Big Tradeoff, by Arthur Okun, written in 1975.

In a financing plan now experimentally used at Yale, the student is offered loans with an obligation to repay that is fixed not in dollars but rather as a fraction of his or her future income. If the borrow’s lifetime income turns out to be very high, the loan will be, in a sense, overpaid, but it will not prove burdensome; moreover, some of the good fortune can be attributed to the benefits of education. On the other hand, the person who does not earn much has no onerous commitment. For society, this concept could be incorporated in a voluntary social insurance plan that would operate in reverse sequence to the present old-age program. Young people get the money first and pay back later, with the repayment levied as a supplementary tax on income.

I wonder what happened to that Yale program. Are any institutions offering loans of this type? It certainly gives the institution a big incentive to help students land well-paid jobs and achieve lucrative careers. That’s not such a bad thing for the student either.

Recognize that there are a lot of possible variations here. What percent of the tuition is tied to future earnings? What percent of future earnings are earmarked for the institution and over what duration? By adjusting these variables, one can achieve different allocations of the cost risk of college between the student and the institution, with correspondingly different incentives for each.

Naturally, if the college is at risk, providing all the up-front costs and expecting a return from future earnings, a student could “take advantage” and get a free education. But to do so the student impoverishes himself. Over a large enough risk pool of students, a few deadbeats would be balanced by high earners. Given the other benefits of high incomes, this seems doable.

One concern would be the student from a wealthy family with a trust fund. Perhaps that family could arrange a free education. If the student never works, the loan would never be repaid. Perhaps loans of this type should only be available to students demonstrating inability to pay up front (i.e., the family has to fulfill a minimum contribution related to its income and assets).

But these are all details. In broad stroke, are ideas like this part of the future of paying for college? Why or why not? If such loans do not now exist, why isn’t the financial industry offering them?

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