

Oregon Explores Novel Way to Fund College - ahsteele
http://online.wsj.com/article/SB10001424127887324251504578582101593420808.html

======
3pt14159
This is a terrible idea.

Malinvestment starts the same every, single, time. Over extending credit to
unworthy investments. Usually this is done through the government because
their primary objective is not to make money, but to appease voters. Sometimes
this is done by financial institutions that offload the risk to someone else
and make their profit on fees, or commissions (but never negative
commissions).

Here is why this is a bad idea: There are no price signals to the potential
students to help guide them to the correct career choice. In Ontario the
things you can get bank loans for are the following: STEM, Medical fields,
Economics, Accounting (both of which are kinda STEM-y).

The government interferes here, by paying the first 75% of the cost and by
creating loans for the poor and almost middle class, but at the very least a
good number of us have to work some amount to pay for degrees that don't pay
for themselves.

Another reason it is a bad idea: It means that universities no longer have to
compete on price, they compete on marketing.

As an aside: There is this general trend that I've noticed. The baby boomers
load up the country or state with debt or equivalent (like defined benefits,
or entitlements) but because the state can no longer handle increased debt
loads they do not afford the same ponzi scheme to Gen-[x-z]. They load us up
with 3% for 24 years on your income on top of the debt that we're going to
have to pay for. Also, how the hell does the majority of the western world go
into debt during a period where the largest bubble of the population is at
their peak earning potential? This is crazy, we couldn't afford largesses
then, and we certainly won't be able to when they retire, and we also have to
service the debt, and we also have to deal with longer lifespans, and we also
have to deal with 3% on our malinvested education subsidies.

What's going to compel this generation to stay saddled with this debt? If we
don't vote it (or spending on seniors) out we'll just move out of the country.
Have Macbook, will travel.

~~~
verelo
Bad debt is a good point, and it comes down to the loan provider agreeing on
what they will and will not pay for. In below references to the Australian
system you'll find that the load provider (the government) will at times stop
providing funding for industries, or limit the number of funded positions (you
still have the option to go at as a full-fee paying student) when there is
less of a need.

A great example of this would be teachers, there are limited positions as
there are a lot already and new positions do not open up as rapidly as
universities can train teachers. A great way to control this and push people
in other directions is to simply not fund that degree to the same extend as
say various engineering courses.

Don't be afraid of it just because the government is involved. It can, and has
worked. There is a lot to gain from having an educated society.

------
shirro
They make reference to the Australian scheme in the article. Student loans in
Aus are indexed by inflation (consumer price index) so they maintain their
real value so as long as wages keep up with inflation it is effectively
interest free and a graduate salary really should do better than just keep up.
The money is collected via the tax system beyond a typical graduate salary.
You hit hard times and drop below the threshold it just accumulates. Just
about the next best thing to actual free government education. This is the
historical indexation for the Australian scheme
[http://www.ato.gov.au/Rates/HELP-indexation-
rates/?default=&...](http://www.ato.gov.au/Rates/HELP-indexation-
rates/?default=&page=1) and [http://www.ato.gov.au/Rates/HELP-indexation-
rates/?default=&...](http://www.ato.gov.au/Rates/HELP-indexation-
rates/?default=&page=2#HECS_indexation_rates)

~~~
grecy
> _The money is collected via the tax system beyond a typical graduate
> salary._

It's worth noting if you are not earning over a certain threshold (currently
$51,309), you don't have to pay anything. If you want to go travelling, you
simply don't pay anything. If you never earn that much (because, say, you work
for a non-profit or are a struggling artist), you are never required pay it
back.

Also, if you leave Australia, you never have to pay it back.

If you do earn over that threshold, you just pay slightly higher income tax in
those years [1]

If you make a voluntary payment of $500 or more, they take your payment plus
another 5% off. [2]

I personally have found it to be a phenomenal system, and I've never met
anyone in Australia that didn't go to University because they couldn't afford
it. (We also get paid a "living wage" to go to University, of around $400
every two weeks, depending on circumstances. [3] )

[1]
[http://studyassist.gov.au/sites/studyassist/payingbackmyloan...](http://studyassist.gov.au/sites/studyassist/payingbackmyloan/loan-
repayment#HowMuchWillMyRepaymentsBe)

[2]
[http://studyassist.gov.au/sites/studyassist/payingbackmyloan...](http://studyassist.gov.au/sites/studyassist/payingbackmyloan/loan-
repayment#CanIPayOffMyDebtSooner)

[3]
[http://www.humanservices.gov.au/customer/services/centrelink...](http://www.humanservices.gov.au/customer/services/centrelink/youth-
allowance)

~~~
bjeanes
Australia's system is amazing. I would be in crippling debt if I had studied
in many other countries but instead I am slowly paying back the debt and
barely noticing the hit.

~~~
verelo
I'm so glad this is getting some attention. It is an amazing system and while
a bunch of issues like people leaving etc are pointed out, for the most part
"what goes around comes around" but in a very positive way for the nation.

People feeling free to travel and experiment, while being educated, just means
eventually when they return home they bring a lot back with them. You wonder
why a nation in the middle of nowhere can thrive? Well yes there is a mining
boom, but also the country is well equip enough to make the most of it.

------
MichaelApproved
This would be a great idea _if_ the schools had some skin in the game too. I
would adjust the plan to have schools not get paid right away. The schools
income will also depend on future earnings of the student.

As govt makes it easier for students to attend school, though guaranteed loans
and plans such as these, schools raise their prices to suck up the benefit
instead of allowing the benefit to go to the student. Also, some schools lower
their qualifications for attending and graduating. They dont care if you're
educated because they have a guarenteed payment from you and the govt,
regardless of how well they educated you.

With a fix percentage of salary, the school has an interest in getting you
educated so you can pay them back with a good high paying job. They can only
earn more money if they make you a better educated student.

------
stephengillie
One of the key parts of this is extending it across 24 years. To simplify the
math, let's assume a graduate gets a job paying $30,000/yr, and annual
payraises of 3%:

    
    
      Year	  Pay		Tuition Payback
      1	 $30,000.00 	 $900.00 
      2	 $30,900.00 	 $927.00 
      3	 $31,827.00 	 $954.81 
      4	 $32,781.81 	 $983.45 
      5	 $33,765.26 	 $1,012.96 
      6	 $34,778.22 	 $1,043.35 
      7	 $35,821.57 	 $1,074.65 
      8	 $36,896.22 	 $1,106.89 
      9	 $38,003.10 	 $1,140.09 
      10	 $39,143.20 	 $1,174.30 
      11	 $40,317.49 	 $1,209.52 
      12	 $41,527.02 	 $1,245.81 
      13	 $42,772.83 	 $1,283.18 
      14	 $44,056.01 	 $1,321.68 
      15	 $45,377.69 	 $1,361.33 
      16	 $46,739.02 	 $1,402.17 
      17	 $48,141.19 	 $1,444.24 
      18	 $49,585.43 	 $1,487.56 
      19	 $51,072.99 	 $1,532.19 
      20	 $52,605.18 	 $1,578.16 
      21	 $54,183.34 	 $1,625.50 
      22	 $55,808.84 	 $1,674.27 
      23	 $57,483.10 	 $1,724.49 
      24	 $59,207.60 	 $1,776.23 
      	Total Payback	 $30,983.82

~~~
sehrope
This does not factor in interest on the original loan. $1,776 in year 24 is
not worth $1,776 today, it's worth considerably less[1].

Here's a breakdown at a couple of different interest rates of $1,776 in year
24 in today's dollars using annual compounding (it'd be a bit more lopsided
using monthly):

    
    
        %0  $1,776
        %1  $1,398
        %2  $1,104
        %3  $  873
        %4  $  692
        %5  $  550
        %6  $  438
    

To do this calculation correctly either the future payments need to be
converted into today's dollars or interest on the original loan needs to added
to it (i.e. calc in future dollars).

[1]:
[http://en.wikipedia.org/wiki/Net_present_value](http://en.wikipedia.org/wiki/Net_present_value)

~~~
stephengillie
The embarrassing part about these posts is that my major focused on Business
Finance...

(...and Information Systems, which I rolled into System Administration.)

------
fosap
The thing i like about this the most is that worthless degrees are free and
usefull are expensive. So it's in the college's best interest to offer
quality.

~~~
yummyfajitas
Most likely the way this will work in practice is that the Oregon government
pays colleges up front on a per-student basis, and then calls the program
"revenue neutral" based on predictions of what they will later pay.

------
swalsh
This whole thing feels wrong to me. The market for education seems upside
down. Education is fastly becoming less about just getting a general
education, and more as a step to achieving a career. I think a very solid case
can be made that a more educated workforce benefits industry as much if not
more than it benefits the employees themselves. I also think we're missing out
on the benefits of well placed pricing dynamics.

Today, most of the decisions are made by the students themselves. By
definition a student does not know anything about the future of the industry
they're entering other than possibly an article they read in a news paper.
What you end up getting are disproportionate classes of students in programs.
On the surface it sounds great. In America I can go to school for whatever I
want. Of course when you graduate there's only demand for 10% of the people in
the program, and if you aren't in the top 10% of people in your program IN THE
COUNTRY, you're not going to get a job in that industry anyways. Plus you now
have a boatload of debt, which you took on for essentially the privilege of
knowing how to do work to benefit your future employer.

I think things would be improved with a few small changes. Break up the
private and public sectors into specific industry categories. Create non
profit organizations to help with predicting future demand, and curriculum,
then have colleges bid on fulfilling it. I think it does two things. It allows
for consistent standards to evolve (so if for-profit institutions bid, they
have to prove they are providing a quality education... today they don't for
the most part) second I would assume these organizations would be better at
negotiating then individual students would be, which I think would become a
big deal as businesses are usually pretty smart at finding ways to pay less
taxes... and if they're paying 100% of the bill for education, they're going
to look out for bad pricing.

------
runarb
If one was to pay 3% of ones salaries annually for 24 years how is "salary"
defined in the US?

Wouldn't a lot of people start demanding "perks" like free cars, food and
housing in exchange for lover monetary pay? Wouldn't this possibly undermine
the fund as the ones with the higher salaries are in a better position of
negotiating these deals?

~~~
727374
The IRS is already thinking about including those perks as part of your
taxable salary anyway...

~~~
bjeanes
Sounds similar to
[https://en.wikipedia.org/wiki/Fringe_benefits_tax_(Australia...](https://en.wikipedia.org/wiki/Fringe_benefits_tax_\(Australia\))

In Aus (and UK, I believe) you can "salary sacrifice" something like a car,
phone, or computer. Essentially the employer buys it for you and just deducts
payments from your paycheck towards it. It isn't income to you, but there is a
fringe benefits tax. Some items, like computers and phones, are exempt from
this tax though.

~~~
arethuza
As far as I know the only thing that works this way in the UK - there is as
scheme where you can get a bicycle tax free and paid by deductions from your
salary:

[http://www.cyclescheme.co.uk/](http://www.cyclescheme.co.uk/)

------
ams6110
What happens if the graduate moves out of Oregon? Who enforces collection?

Frankly I think this idea is silly. The primary reason that the cost of
education is out of control is that so many people are not using their own
money to pay for it. In trying to make education affordable to everyone, we've
achieved just the opposite. Universities are bloated, top-heavy with highly
paid administrators and staff who actually do very little work, and they can
afford it because they can just increase tuition by near double-digit
percentages every few years and get no market pushback.

~~~
JonFish85
I very much agree with you. As much as I appreciate the idea of everyone going
to college, I think the idea of making loans easy for anyone to go to college
has been a huge disservice to a lot of people. Students don't view the money
as "real", they simply view it as a free pass to go to the "best" (i.e. most
expensive) college. Universities know that students can get loans to cover
their costs, so they raise the costs as fast as they can. Also deserving some
blame are parents who don't spend enough time really working with their kids
to remind them that a $50k/yr loan, WITH INTEREST, is going to be insanely
hard to pay back.

But ultimately universities are going to raise tuition as high as they can
because they know that students can get loans very, very easily.

~~~
tzs
So how do you explain wait lists? If your theories about how tuition is set
were correct, wouldn't we expect universities to set the price high enough to
eliminate wait lists?

~~~
zaccus
Wait lists are great for marketing; they increase a school's "prestige" in the
eyes of potential students.

A university doesn't want fewer applicants because that would mean a higher
acceptance rate, which is bad.

------
verelo
Welcome to Australia for the last 73 years:
[https://en.wikipedia.org/wiki/Tertiary_education_fees_in_Aus...](https://en.wikipedia.org/wiki/Tertiary_education_fees_in_Australia)

Look at the "Repayment" section. Essentially until you're earning money, you
don't need to worry about the loan and it only goes up by the current
inflation rate. Good incentive for the government to ensure there are jobs and
means people don't just take the first crappy position that is thrown their
way when they finish their degree.

~~~
tigroferoce
Hey, we have that in Europe too.

Great step americans. Now join us also on health-care ;-).

~~~
verelo
I honestly dont think the structure at has been generated in the US will work
as it stands today. There are a lot of edge cases they're not discussing, i.e.
if people move to another state how do they track it? If people leave the
country? I know a bunch of issues like these, that took a while to iron out in
Australia that will likely take a while in the US too. I hope it doesn't get
thrown away before it gets the chance to settle in.

------
jrochkind1
It's interesting to compare this to the pre-paid fixed-price education plans
that several states did ~20 years ago, with mixed results. You buy in when
your kids are children, and are guaranteed tuition will be covered when they
are college aged. Some programs have had trouble staying balanced though.

[http://www.michigandaily.com/content/michigans-education-
tru...](http://www.michigandaily.com/content/michigans-education-trust-doing-
ok)

------
Ensorceled
At some point the generation that we are currently screwing over for higher
education is going to get into power. If they cancel all social security
payments and tell old people (e.g. the boomers) to pay their own way or eat
dog food, they will be complete justified.

------
pdq
I do not think "free" means what you think it means.

~~~
runarb
> I do not think "free" means what you think it means.

Unsure if anyone can define "free" this days. It must be the most misused word
in the English language.

~~~
stephengillie
"Free" as in: Beer? Pizza? Range? For all?

~~~
runarb
"Oregon free". You get four free beers now, but most pay 3% of you salary next
mount in return. You need a minimum of 2 000 monthly pay to qualify :)

------
zackmorris
Am I the only one reading most of these comments and thinking that everyone
has completely missed the point? That paying back student loans as a
percentage of income instantly relieves the crushing burden of paying back a
fixed dollar amount per month?

Hasn't anyone else put off starting their own business because even a few
hundred dollars a month severely impacted their burn rate? I still owe over
$8000 even though I graduated from college in 1999. I could write a check for
that today, but there was a period in the early 2000s where I was so destitute
that my student loan payment was more than my rent! I would literally be
living a different life today if the proposed repayment plan had been
mainstream when I graduated. I can't even imagine the ramifications of that,
times a million other entrepreneurs. Where has our vision gone?

------
reader5000
This is how it should have been done all along.

The "higher education" system as it exists now is just pure exploitation, and
decimating the middle class.

Allow current student loan holders to enter bankruptcy like normal human
beings, and have all future financing be a small set cut of future earnings.

Focus much more energy on apprenticing programs like in Germany, where kids
actually get real job experience instead of sitting in a classroom with 150
other kids while some 28 year old associate professor walks through a
powerpoint presentation.

I mean, the basic problem is that corporate America doesn't really need as
much labor input anymore. But we have an entire generation of young Americans
who pay more on the "education" loans than their rents. That's a complete
injustice.

~~~
ksherlock
There's a reason bankruptcy doesn't discharge government student loans:
congress amended the bankruptcy laws in 1978. Why? Reports of abuse from
doctors, lawyers, and other high earners that racked up massive debts and
declared bankruptcy immediately after graduation.

People with $100,000+ in student loans are the 3%.

------
brudgers
Overall, as a person who has enjoyed the generational advantages provided by
accessible college educations, I think this plan is a Rawlsian good.

Of course, it has its flaws, such as repayment being tied to salary rather
than income - and how does this work for a married couple from a tax
perspective? Expect the percentages to increase and repayment to become
increasingly regressive. I doubt it will curb the administrative bloat and
sports subsidies and student amenities which have driven costs upward.

But at least it is a start. Schools are our greatest incubators and
replicators of beneficial memes.

------
flexie
Oregonians will be pay for college until their late 40s?

What about the next tech billionaire. Will he pay USD 30 million for every
billion he makes?

~~~
arethuza
I would have thought that something like this would be based on income, not
capital gains.

~~~
fosap
In my understanding of the word capital gains are a subset of income.

~~~
jlal
But capital gains aren't taxed as income.

[http://blogs.reuters.com/felix-salmon/2013/06/05/why-
capital...](http://blogs.reuters.com/felix-salmon/2013/06/05/why-capital-
gains-should-be-taxed-as-income/)

------
fiatmoney
If you have the option of paying a percentage or a flat fee, it would seem
like those with an expectation of high future earnings would always take the
up-front cost, leaving you with a much smaller pool of students. Once you near
the end of that 24 year period, I'd also expect to see a lot of deferred
compensation schemes amongst high earners.

~~~
refurb
"Adverse selection" was mentioned in the article. Going into a lucrative
career? Self-fund. Want to learn something that will never pay you a decent
wage? Sign up!

What you end up with is a bankrupt system program in a decade or so.

------
peterjancelis
This is the kind of idea that sounds great to everyone but the type of student
you need in the your system to remain solvent.

------
fiatmoney
Or, more or less equivalently, one could tax the population at 3% of income,
and fund a free education system. It slightly disadvantages those without
degrees, but I'd argue there are enough positive externalities that they still
come out ahead.

------
gyardley
Huh - it looks like Oregon's government has designed a rather nice hedge
against inflation.

As long as fixed-rate loans are still available, this smells like a bad deal.

------
eertami
3% is quite low isn't it? In the UK I believe it is 9% of your salary for as
many years as it takes to pay off the debt.

~~~
mstrem
In the UK you only pay 9% of what is over 21k pa though, so its not that bad
(note, this is different than 9% of the total wage).

There are also a few more benefits. Technically if you never find a job you
will never have to pay for your tuition.

------
mgraczyk
It would be pretty ironic if you used funds from this plan to pay for a degree
in economics.

------
6d0debc071
This is a horrible idea. Removing the financial barriers to college will get
kids who shouldn't be going to go anyway without thinking about it.

I don't think education should cost an arm and a leg but you should have to
think about it as your money. Which, IME, a lot of kids going to uni don't
under a deferred payment system (a similar thing is currently operating in the
UK - though there it's based on repayment of the loan against the ... I
believe... consumer prices index.)

Honestly, I almost think that university is a bad idea altogether for many
people these days. If a company wants a trained workforce they should be the
ones paying. Seems the wrong way around at the moment. The kids have to take
on all the financial risk themselves - but at a significant information and
power disadvantage.

~~~
mertd
That's only valid if you see university as purely vocational training.

~~~
6d0debc071
No, I think university fails in numerous areas and business is the strongest
remaining one - in effect its ties to certificates that industry might value
is what university has _left_. Few would be able to justify to themselves
going there otherwise.

If you want a well rounded general education, you're - by and large - best off
providing it for yourself if you don't need someone to stick a rubber stamp on
it for you.

------
michaelochurch
Better way to solve this problem:
[http://michaelochurch.wordpress.com/2013/05/07/fixing-
employ...](http://michaelochurch.wordpress.com/2013/05/07/fixing-employment-
with-consulting-call-options/)

A state government is actually diverse enough in needs to create a full market
for these options; it wouldn't have to sell/transfer them on a secondary
market to profit.

------
lesslaw
This is a good idea in general. It is really what the market should be
correcting for already.

I don't understand why the _college_ doesn't lend you the money to attend
their courses already.

