No one is talking about the best and cheapest solution
Unless your last name is Rockfeller, chances are you're unnerved by the sky-rocketing cost of a college education. Perhaps you've heard that between 1981 and 1995, tuition at even traditionally affordable public colleges increased by 234 percent--almost three times as fast as median household income. Not to worry. Help, or rather, the politicians are on the way. President Clinton has introduced a series of measures that, he claims, will make at least the first two years of higher education affordable for everyone. The good news is that Clinton's plan has sparked a spirited debate. Deep thinkers from both ends of the spectrum have come forward with proposals of their own. The bad news is that tEe most effective--and least costly--solution isn't even being mentioned.
The debaters fall into two camps. On one side are the tax break cheerleaders. Included in this category are hard-right Republicans, who favor a variety of measures--like allowing people to deduct part of the interest on their student loans--that are of dubious benefit unless you happen to be in a high tax bracket. Also in the tax break camp is Bill Clinton, who is touting a less regressive plan. Still, Clinton is hardly mounting a socialist revolution. One of his main proposals, to let families with incomes of up to $100,000 take a tax deduction of up to $10,000 for the cost of higher education, is as generous a gift to the upper middle class as anything the GOP could come up with. To mollify the critics, Clinton has also suggested a tax credit to allow families to keep up to $1500 a year for the first two years of postsecondary school. Since students would have to deduct any federal grant money they receive from the credit, the main beneficiaries would be those in the lower-middle class, who earn too much to qualify for grant assistance, but not enough to really gain from the deduction. The cost of Clinton's tax breaks: $36.2 billion over the next five years.
In the second camp are those who claim federal grants are the way to go. Members of this group include think-tanks like The Institute for Higher Education Policy, which recently co-published a report pointing out that even Clinton's tax credit is of no help to the people who really need it: low-income kids who can't afford to go to college. The meteoric rise in the cost of college, combined with the dramatic decline in government assistance, has hit these kids particularly hard. From 1981 to 1994 the real value of federal "Pell grants" fell by 22 percent. According to economist Thomas Mortenson's analysis of the government's Current Population Survey, today less than 10 percent of kids from low-income families earn a college degree--compared to 80 percent of those in high-income households. Instead of wasting billions of dollars on tax breaks for middle-class students who would go to school anyway, the grant advocates argue, why not spend it on more and larger grants to the neediest students? The Clintonites counter that the point is moot. To ask for anything more than the small Pell grant increase included in Clinton's budget is hopelessly naive, sighs David Longanecker, Assistant Secretary for Postsecondary Education. "We're working with a Congress that doesn't give us that option."
But by framing the issue as a choice between tax breaks or grant increases, Longanecker and the rest ignore a crucial point: there's a third option--one which is far more effective and a whole lot cheaper than either grants or tax breaks. What's more, this plan, or at least a flawed version of it, is already on the books. All that's needed is to get rid of the defects and to implement it properly.
The Third Way
The idea, in its ideal form, is deceptively mundane. Instead of requiring students to pay back their college loans on a fixed schedule, give them the option of taking out long-term loans that are "income-contingent." In other words, the student's monthly repayment is set according to his ability to pay. If his income is low one year, he will pay less back. If he gets a big raise the next year, his payments will go up accordingly. This plan is hardly new: it's been advocated for years by such diverse figures as conservative economist Milton Friedman, and neo-liberal writers Walter Shapiro, Mickey Kaus, and Timothy Noah.
The seemingly simple "pay-as-you-can" formula has enormous potential. And unlike tax breaks or grants, it helps people in all income groups. Working-class students who take out an income-contingent loan will not be forced to repay their debt in impossibly large installments--making them far less likely to default. Middleclass graduates who want to go into useful but low-paying fields, like teaching or social work, will be able to afford that choice. Lower-income kids contemplating college will no longer be discouraged by the fear of taking on a financial burden they might be unable to carry upon graduation. In short, if income-contingent loans were to become widely available, college could become affordable and accessible to everyone. An added bonus: since students would increasingly be the ones paying back their loans, they might be more likely to insist on getting their money's worth, spending less time partying and more time studying, and pushing their schools to reciprocate with lower prices and better quality.
Finally, there's the wonderful boon to taxpayers. Because unlike Clinton's tax breaks, which would set the treasury back $36.2 billion, or grant increases, which would involve additional government spending, a fully implemented income-contingent loan plan would be relatively cheap. The majority of the loans would be financed by the banks. As for the portion financed by the government, the loans would eventually be repaid. Thus the same sum of money could be used over and over again to help successive generations go to college.
How the plan SHOULD work
So what's the best way to make income-contingent loans widely available? Well since these loans may involve long repayment periods that make them potentially less secure and profitable, banks are unlikely to provide them without an incentive. And what better inducement than a little competition from Uncle Sam? By getting into the student-loan business the government would not be attempting to take it over--after all, why use taxpayer money if the banks are willing to do it? Rather, the aim would be to encourage more banks to offer students the pay-as-you-can option and--in the event the banks don't bite--to ensure that all students at least have access to it through the government's program.
There's plenty of precedent here. The Tennessee Valley Authority (TVA), for example, was established in 1933 in part to make cheap electrical power available to the area's inhabitants. The result was to spur nearby private companies, which had been charging twice as much as the TVA, to offer their own customers lower rates.
To prevent borrowers from lying about their income, banks could be allowed to forward cases of suspected cheaters to the IRS for verification. The penalty for fraudulent reporting would be severe. And the IRS could ensure repayment of government loans, as well as defaulted bank ones, by taking the repayments directly out of borrowers' paychecks, as if they were just another tax. That's better than asking people to mail in checks, and helps prevent defaults--not because the IRS has been operating at optimal efficiency lately (it hasn't), but because adding a line or two to the federal income tax form is a lot more effective than other means of collection.
To further sweeten the deal for banks, the government would guarantee income-contingent loans--as it already does with the garden-variety kind. At present about 10.7 percent of students default on their loans. Clinton can be justly proud of the fact that by clamping down on abuse, his administration brought the default rate down from a high of 22.4 percent four years ago. Presumably the pay-as-you-can option would make defaults even more rare--students would have as long as they needed to pay off their debt and, since the average college graduate earns $1.4 million over his lifetime, almost all of them should be able to swing it.
Practice Makes Imperfect
Unfortunately, although an income-contingent loan plan is already on the books--introduced and signed into law by Clinton in 1993--the program has yet to fulfill its potential. That's because both the legislation establishing such loans and the Clinton administration's efforts to implement it have been problematic.
