
Should Oregon fund college through equity? - gwern
http://marginalrevolution.com/marginalrevolution/2013/07/should-oregon-fund-college-through-equity.html
======
trothamel
If after 20 years, a student (or the total body of students) has not paid off
the cost of college, who pays the difference - the school or the taxpayers?

A program like this makes sense if the school has skin in the game. Ideally,
the potential to lose its investment would make the school only extend this
offer to students with a realistic chance of breaking even.

On the other hand, if the state extends this to all students without concern
for ability to repay, it seems likely to be just another taxpayer subsidy for
education - which may be good or bad, but it's not clear why a roundabout
method like this is better than a direct tuition discount.

~~~
cardiffspaceman
The sum of all receipts from these 3% payments is supposed to cover the
corresponding expenses. In a way the successful stock broker's 3% makes up for
the starving artist's meager 3%. So the scheme breaks even if enough high
earners bail out the school's investment in low earners.

~~~
msandford
Right but that only works when people don't have a realistic ability to
understand their future earning potential.

If I can calculate that my earnings over the next 20 years should be $2mm and
3% of that is $60k I can look at the $60k number and compare it with the
amount of debt I'd have to go in to pay outright and do a calculation. If I
only need to pay $10k/year in tuition that comes out to be $40k instead of
$60k and I'd be foolish to accept the school's proposition.

This is the same problem with why insurance companies don't want to offer
insurance for people with a pre-existing condition. Many conditions are
expensive enough to substantially raise premiums. The people with those
conditions are in a better place to know if they have higher than the premium
costs or lower than premium costs. Those with higher than premium costs would
like to purchase insurance because they get their care at a discount, since
the insurance company only charge people for the premiums. Those with lower
than premium costs won't pay because they know they're not getting their
money's worth out of the premiums. So the pool of candidates for insurance
that covers pre-existing conditions (at least under the premise that insurance
companies are allowed to price as they have been) self-selects to only those
folks who have a reasonable expectation of saving money. This happens no
matter what level you set the premiums at.

If people have the option to either pay up-front or choose the 3% plan there
will be a good correlation between people choosing the plan and paying less
than they would up-front, and people choosing to pay up-front and paying less
than they would on the plan. So the economics don't work.

If they're smart and anticipate this problem and say "this is just how it
works at this school" they might be able to succeed if the school confers a
substantial advantage relative to other alternative schools. Say Harvard or
MIT or Stanford. But if not, nothing compels people to go to a school where
they would pay more for their education than at another school and thus many
of the people who anticipate being high earners would probably choose
alternative and the economics don't work again.

The next evolution of the idea would probably come by way of saying "okay
let's adjust the percentage based upon the actual cost of the degree and the
expected future earnings" which would make the higher earning degree programs
look like excellent deals and lower earning degree programs look like worse
ones. This would be a refreshing bit of honesty from a university, helping
students make wise decisions instead of simply pocketing their money without
offering any real advice but I digress. This then puts the different degree
programs in the position of trying to determine who to let in to the now more
sought after programs and who to reject since they're going to have an
increase in applications. They're going to have to speculate on the future
earning potential of all their students because if they break the distribution
they go broke.

That makes a college akin to an angel investor; putting a small amount of
money into many, many deals and hoping that they end up bringing in enough
after the 20 years is up to keep in business.

I am not optimistic that colleges will do a good job of managing this risk
effectively and selecting properly.

~~~
eli_gottlieb
> Right but that only works when people don't have a realistic ability to
> understand their future earning potential.

Any program whose funding prospects rely on people being unable to game it
without _predicting the next 20 years of their personal economic history_ will
do pretty damn well.

------
shelf
This is pretty much how it works in my country (Australia). Those earning
under 55k are not required to make repayments, and those who never earn that
salary do not repay a cent.

The government of course loses money on this scheme, but the people would tear
down any government that tried to revoke it. It's an important and fair middle
ground between national free ride and a USA-style 'sins of the father' system.
Also note that the repayment amount is nowhere near the true cost of the
degree, due to Conmonwealth-supported places.

If you have time to work your way through school at current US tuition, you
are probably taking courses below your level.

~~~
jdoliner
But does the college ever get to hit it big in Australia? If one of your
students goes on to earn millions do you get 3% of that? Or is it capped at
some value?

~~~
xmodem
The Australian system is like an interest-free loan that you don't have to
make repayments on until you earn above a certain threshold. The government
gets the same return from a student making $60k as one making $1m through the
scheme.

(Currently the amount you owe is indexed with inflation. At the moment the
federal government is trying to change it to accrue interest at the bond rate
(3.8%-6% rather than 2%-3%) and reduce the income level before you have to
start making repayments, but it's unlikely they will be able to get the votes
to get this through the senate.)

------
mathattack
_Twenty years is a long time and I fear the implied selection mechanism
embedded in that time horizon. At the margin I would expect this to attract
people who don’t have a vivid mental image of the distant future. Furthermore
the terms of the program discriminate against those who expect high earnings
or for that matter those who expect to finish. In other words, the drop out
rate of the marginal students here may be relatively high. And what are the
payback terms for dropouts? Do they get off scot free? Pay proportionately for
what they finished? Pay much much less to reflect their lower expected wages?_

This captures my intuition. English and Sociology majors will choose this, not
Math majors and Computer Science.

I had heard that Yale had experimented with a similar program. The problem is
the distribution. It sounds great for the median student. The low end don't
make enough to pay their way. The high end make a ton of money, and push back
on paying. In Yale's case they may not have had all the forceful levers of the
state. (And Yale wouldn't want to push too hard on the top 1%, alienating
their best alums)

------
facepalm
Congratulations, you have just invented taxes.

Coming from a country where education is funded by the government, I really
have to chuckle at this.

Wouldn't it be revolutionary to simply pay for education with taxes (say, 3%
of people's income), and let people go to university for free? Guess what -
that system already works in several countries to good effects.

Granted, a tiny difference is that apparently in Oregon only people who
actually study pay the tax. But in general, the state collects taxes from
everybody and invests in things that don't benefit everybody, and it works out
OK.

On the other hand if they could work out how to only tax people for things
they actually consume, it would be interesting, too (VAT maybe?).

~~~
jdoliner
> Granted, a tiny difference is that apparently in Oregon only people who
> actually study pay the tax

This is actually a very big difference because it completely changes the
incentive structure. With normal taxes the college has no monetary incentive
to improve the education they offer. Because the only things that can get them
more money are things outside their control such as increasing the tax rate or
increasing the taxable population. On the other hand in this scheme if the
college has a better offering they can attract better students and better
equip them to earn money. Both of which ultimately help them make more money.

Furthermore the thing I like best about this idea is that it switches around
the risk. In a system where students pay tuition the students put in a big
chunk of capital up front hoping that it will increase their future earnings.
If it doesn't they bear the loss which isn't necessarily bad but given how big
the risk is (at least in the US which is what I'm familiar with) it's not
great. In a normal tax system everyone bears the risk which also has some
upside but when everyone bears the risk sometimes capital doesn't get
distributed that well. In this system the college bears the risk which I like
a lot because it makes them really evaluate how they're educating people.

One problem I do see with this is that if it's not the only option you might
wind up with a selection bias wherein students who don't think they'll have a
high income will take the deal while others won't.

------
darklajid
No. Instead, you use the budget that the huge amount of taxes leaves for
education and let students study for free (or close to free).

Really, the headline makes me cringe, the idea that some people consider this
a good idea makes me cry and the domain name ("marginalrevolution") is a joke
in this setup.

What a sad idea..

Edit: The state/the country already HAS equity (Ignoring the bullshit and that
I think that this link only made HN because of this trigger word). It's called
'taxes'. If you flip burgers, the state gets little money. If you work for
Google, FB, Apple, MS (yeah, all not in Oregon. But stay with me) the state
makes quite a nice sum, every year, for ~40 years that you're supposed to work
(k, feel free to reduce that number).

I haven't seen so many bullshit alarms related to a HN story going off for for
quite some time. I would love to sit down and talk to someone that seriously
considers this 'cool' and 'a nice idea' and try to understand how that is even
possible.

~~~
opendais
> It's called 'taxes'.

The problem with "taxes" as the solution is if the grad leaves the state, they
wouldn't get the money. "Taxes" is not a solution.

The only way "taxes" would work if this was a national plan since the number
of people that leave the country is small enough to be safely accounted for.

~~~
glesica
Or just tax the people who move _into_ the state... state populations don't
generally change _that_ much, with a few notable exceptions.

~~~
opendais
Point is, its fairer to tax the people who use the service than those that
don't. :P

~~~
glesica
But isn't that just a re-hash of the age-old, and fairly weak, argument
against all taxes? We all pay for things we don't use, and we all use things
that other people pay for. The point of taxes is to make large, long-term
investments that the private sector won't make on its own, and university
education falls squarely into that niche.

And just to head it off before it starts, no, the private sector won't fund
universities, not the kind we need. The private sector will pay for job
training, yes, but not real education (the kind that teaches the sorts of
literacy necessary for a successful free and democratic society). Look up the
difference between specific and general human capital to see why (at least
partially) this is the case.

~~~
opendais
If you think some kind of tuition requirement, whether it is paying up front
or a long term tax of 3% on income, is a bad idea...I'm really lost at what to
tell you.

1) There is a cost to go to college, someone has to pay. 2) That cost needs to
be borne by those people whose incomes are enhanced by going to college. 3)
Simply producing "more college graduates" isn't a net positive when 60% can't
find jobs in their field.

If you think any of these shouldn't be true, we aren't going to agree on
anything and you should stop trying.

[http://www.oregonlive.com/education/index.ssf/2013/10/univer...](http://www.oregonlive.com/education/index.ssf/2013/10/university_of_oregon_state_to.html)

It isn't like I'm saying to cut state funding to the school. I'm saying if you
want to raise state funding, the college graduates should pay for it. They
utilize the service.

------
inanutshellus
> Yet the European systems of higher education are generally worse than those
> in America

Wait, what? Can I get a source on that, bub?

~~~
peteretep
[http://www.topuniversities.com/university-rankings/world-
uni...](http://www.topuniversities.com/university-rankings/world-university-
rankings/2013)

If you discount England's outsize performance, you go a long way before you
leave American dominance.

~~~
pgeorgi
Three of six factors in their ranking (International Faculty, International
Students, Citations per Faculty - to some degree) are heavily influenced by
language.

Given English's dominance in academia and business it's no wonder that
english-speaking universities take the first 11 places.

It's also not that important to prospective students outside English speaking
countries - of course they'll need the skills eventually, but there's really
no need to hold intro courses in English elsewhere.

------
zw123456
This is a very interesting idea, I hope more states and university try out
different approaches. I got my first degree in 1978 and I did it by "working
my way through school" which I think is no longer possible for most students,
unfortunately. I wish there was a way of promoting that approach, I honestly
think that I grew and learned in many ways through the combination of working
and going to school. It is very sad that young people today cannot work and go
to school and end up with a good education and a job at the end the way I did.
I applaud the innovativeness of Oregon, but I do not think it is the best
approach.

------
angersock
So, we're going back to indentured servitude by bits and pieces? Progress
indeed.

~~~
tadfisher
Voluntarily entering into a contractual agreement is indentured servitude?

~~~
pessimizer
Yes. Literally. Indentured servitude is when someone voluntarily enters into a
contractual agreement to serve for a certain number of years in return for a
payment. What did you think it meant?

edit:

[https://en.wikipedia.org/wiki/Indentured_servitude](https://en.wikipedia.org/wiki/Indentured_servitude)

"Farmers, planters, merchants, and shopkeepers in the American colonies found
it very difficult to hire free workers, primarily because it was so easy for
potential workers to set up their own farms. Consequently, a common solution
was to transport a young worker from Britain or a German state, who would work
for several years to pay off the debt of their travel costs. During the
indenture period the servants were not paid cash wages, but were provided with
food, accommodation, clothing and training. The indenture document specified
how many years the servant would be required to work, after which they would
be free. Terms of indenture ranged from one to seven years with typical terms
of four or five years"

------
judk
This is not a revolutionary idea. Public college has traditionally been
heavily subsidized by the state, and paid back by income and property taxes ,
aka an equity stake.

------
MarkMc
What if the university didnt issue paper certificates and only published on
their website the names of graduates who kept up their loan repayments. If you
failed to make a repayment then your name would disappear from the website and
you could no longer officially prove to a potential employer that you had
graduated. Wouldn't that reduce the rate of student loan defaults?

~~~
jdoliner
What if I took a screenshot of the website?

That threat seems awfully weak I'd like to think that most employers would be
willing to accept even though the website took my name down I still had the
education in my brain and would still be the same employee even though my name
wasn't up on the site?

~~~
MarkMc
Screenshots are easy to fake - that employer would get dozens of applicants
claiming they graduated but saying they only had a screenshot to prove it.
Only a few would be telling the truth. Under those circumstances the employer
would simply reject them all.

------
hawkice
The rising cost of education coupled with systems that work best with future-
low-income-earners will likely push the smartest people out of schools.

I am concerned that making it all the way through a degree program has already
started to indicate you aren't world-class, and things like this will only
accelerate this trend.

------
joshu
Does this map to offering different loan rates for different degrees?

------
was_hellbanned
Western Oregon University is around $3,000 per term for 15 credit hours. Let's
call it $12,000 per year with books. OSU estimates resident tuition at $9,123
and $1,965 for "books & supplies".

I worked part-time during school and full-time during summer and put myself
through college at Western, graduating with no debt. I lived with my parents
and commuted to school. I don't see why this program is necessary.

~~~
psychometry
Have you ever considered that other people's circumstances might differ from
your own? You should like one of those Paul Ryan-types who believes anyone can
just stop being poor by trying harder.

~~~
was_hellbanned
_Have you ever considered that other people 's circumstances might differ from
your own?_

Certainly, but I haven't met many people who didn't have parents, and very few
who couldn't live with them (or other relatives) while working and attending
college. I have, however, met a great many people who took on significant debt
(or used their parents' money) in order to attend distant colleges.

 _You should like one of those Paul Ryan-types who believes anyone can just
stop being poor by trying harder._

Absolutely nothing I wrote indicates anything of the sort. In the future, I
suggest that you form a response using something other than personal insults
built on assumptions. All I did was post two examples of the (extremely
affordable, imo) Oregon state university tuition.

I could go on to point out that a huge part of rising costs are related to
cost of living, due to supposedly increased expectations of students, and
provide a counter example of how a friend of mine (the eldest daughter of a
poor, single, Mexican-American mother, who was in the ROTC program) lived very
cheaply in Corvallis in a commune-style arrangement, also working part-time,
but then you'd probably want to talk trash about her, too.

