Opinion, Berkeley Blogs

An alternative funding model to support higher ed excellence

By 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.

    5. 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.

      4. 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.)