A survey of student debt elimination ideas

A great number of students in the United States take on debt when they attend university. This upsets many, and so ideas about how to eliminate student debt altogether have proliferated. Here I summarize the main ones, argue in favor of a universal income-based repayment scheme, and raise some objections to equity financing schemes.

1. Lump-sum cash transfers

Under this plan, when people graduate from high school (or perhaps turn a certain age), the government will send them a large lump-sum check equal to what it would cost to attend a four-year college. The checks are sent out universally to all people regardless of whether they decide to attend college. Those who do not go to college can use the money for whatever they want, including for instance starting a business or buying a house. This plan is supposed to achieve the following: 1) the virtual elimination of student debt, 2) ensure fairness between students and non-students by giving equal cash to both, and 3) provide downward cost pressure on universities.

2. Public option plan

Under this plan, the government funds public universities with tax revenues, and those who attend the universities do so for free. The government would not fund private universities however. The benefits of this plan are supposed to be: 1) the virtual elimination of student debt for those who opt for the public option, and 2) providing downward cost pressure on private universities by providing a free alternative. By itself, this approach does not address the fairness problem created by sending significant sums of cash to college students while sending none to non-students. It also could prove to be a giveaway to the rich, as well-off kids capture university spots at heavily disproportionate numbers. If implemented alongside other kinds of policies however, this plan could avoid some of those problems.

3. Equity financing

Under this plan, private investors would create colleges that students would attend. Instead of students paying for college, investors would get an equity stake in the future earnings of the students. That is, a student would attend an equity college and pledge some percentage of her future earnings. This is supposed to have the following advantages: 1) virtual elimination of student debt, 2) downward pressure on costs at universities, and 3) universities having the incentive to put kids on the most lucrative possible career path.

4. Universal income-based repayment

Under this plan, the government would fund colleges directly. Students would attend for free. To finance this direct funding of colleges, the government would impose a surcharge tax on holders of college degrees. Depending on what is necessary to make the accounts match up, the government could impose a 5% surcharge tax on the incomes of those with college degrees. They might also implement the surcharge tax progressively. The benefits of this plan are: 1) virtual elimination of student debt, 2) redistribution from high-earning graduates to low-earning graduates, and 3) avoiding fairness problems by making only those with college educations pay for it. In a way, this is just a hybrid of option (2) and (3).

I favor the universal income-based repayment scheme for a variety of reasons, most of which were listed in the benefits above. I see this issue as primarily one of fairness. Only around 1/3rd of the population gets a college degree. Those who do so come from (very) disproportionately wealthy backgrounds, and receive quite a handsome wage premium for doing so. Even though the overwhelming majority of college degrees generate returns in excess of the cost of attendance, that is not always the case, and people do not like debt.

We should try to eliminate that debt, but not in a way that is a huge windfall for the rich and future rich (something I suspect just handing money to college students would be given the demographics involved). Universal income-based repayment solves the problem of eliminating debt while achieving the maximum amount of funding fairness. It does not tax the poor to pay for the education of the future Mitt Romneys, and it imposes the heaviest costs of college education on those who benefit the most from it, all while ensuring no repayment burden is too high.

Against this scheme, it is totally unclear what equity financing is supposed to do better. On its rosiest description, one could argue the scheme would incentivize colleges to educate kids more and set them up for better careers. However, in the modern economy, very high-paying jobs are largely positional goods. An equity college would presumably spend much of its time prepping kids to intensely fight for jobs in consulting firms and Wall Street, which is pretty much what elite schools already do. Fierce zero-sum competition for high-paying jobs, many of which provide very dubious kinds of social contribution, is not a plus in my mind.

One last thing to note is just how far you want to take equity college. Should such a college be allowed to require women to give up higher equity stakes in their future income? How about people of color? In aggregate, these populations pull down less even with the same education. A smart equity investor would need a higher equity stake from those populations to cover the risk premium. That seems pretty repugnant, but then again so too does private ownership in future incomes, an institution that literally mirrors indentured servitude.