In August, the Biden administration released a plan to forgive up to $20,000 of federal student-loan debt per person. The announcement was a welcome development for many graduates struggling with their payments and was widely celebrated by advocates of debt relief.
But now the plan is on ice, blocked by an injunction issued by the U.S. Court of Appeals for the Eighth Circuit. The Biden administration has appealed the decision, and the Supreme Court will hear the case in February. Meanwhile, borrowers who’d hoped to benefit are stuck in limbo. So is a proposed change to income-based repayment plans, which aimed to ease the burden of debt for future borrowers.
The travails of the debt-relief plan illustrate the need to think more creatively about how to finance higher education. In years past, public-college tuition was kept very low by state investment in public universities. But today, levels of investment have in many cases dropped from about half of a university’s budget to less than 10 percent. In some states, these aggregate reductions have been mitigated by the creation of state programs funding individual tuition support for residents, as in South Carolina and Louisiana, yet it’s still clear that states will no longer be the primary source of public-university support. To be sure, it is worthwhile continuing to advocate for increased state funding of public universities, but we needn’t put all our eggs in that basket. We need new ways to finance higher education.
If we are serious in arguing that higher education is a public good, then we should finance it like one; we should take some lessons from my own field, infrastructure planning.
Financing an equitable higher education can be done: The U.S. has near-universal water supplies, transportation, and electricity for even its poorest residents. What would happen if we applied the same principles to the public goods that universities provide?
Public infrastructure is rarely funded fully by upfront subsidies in the way that advocates for “free college” suggest. Instead, infrastructure projects rely on floating debt that is tied to long-term user fees through the life of the infrastructure. Think of your water bill, which over 30 years helps pay down the debt associated with building your local water system. According to the National Association of Counties, government investments in transportation infrastructure, for example, total substantially less than half of the actual costs, with bond-market investors covering the bulk of the upfront costs. Over time, individual users collectively pay back that debt through costs like gas taxes, transit fares, or tolls. Whatever the repayment mechanism, end users never take on that personal debt the way we now expect college students to do.
The basic question at hand is: How do we cover the upfront costs of higher education when individuals are unable, or unwilling, to take the financial risk? I propose that universities invest directly in student success through paying their tuition upfront, in the same way that governments invest in roads and water systems.
This could be done with the financial support of state-supported bond programs — or less preferably through the private capital markets (after all, student debt is a $1.5-trillion market), like most conventional forms of infrastructure. Upon graduation, a graduate would be asked to pay a small percentage of income back to the university for the duration of the graduate’s career — let’s say 3 percent to 5 percent. The graduates who become millionaires will financially outweigh those who drop out of the labor market. This mechanism should ensure that the monthly costs aren’t too burdensome.
The economic fundamentals of “investing” in our young people in this way are solid. We know that, in monetary terms, the bachelor’s degree is a worthwhile endeavor: Georgetown University’s Center on Education and the Workforce reported last year that someone with a four-year degree will earn $1.2 million more over a lifetime than someone with a high-school diploma. This is especially the case for public flagships like my own institution, Louisiana State University. At LSU, in-state tuition hovers around $12,000 per year and out-of-state around $29,000. The average first-year salary for graduates is about $54,000, and a career enabled by that credential is usually over 40 years long, with salary generally increasing steadily over time. To an infrastructure planner, these economic fundamentals shout out that a viable finance model is possible.
Financing an equitable higher education can be done: The U.S. has near-universal water supplies, transportation, and electricity for even its poorest residents. What would happen if we applied the same principles to the public goods that universities provide?
Wall Street and Silicon Valley invest in companies expecting financial returns from these expenditures; moreover, they invest in multiple companies anticipating that some will result in returns and others in losses, and that the overall portfolio will generate lucrative profits. Start-ups and other businesses happily overcome upfront financial costs by promising investors a share of future benefits. If a college degree is a great benefit in the marketplace — as it surely is in aggregate — why would students needing financial resources not feel the same way? What if the university itself — with its 100-plus-year history of successful graduates, functional support structures, rigorous admissions processes, and enthusiastic and employed alumni bases — truly saw itself as investing in its students with the expectation that it is building a lifelong financial relationship? I’ve done the math, and initiating a sustainable model is less fantastical than you’d think.
This proposal resembles income-share agreements, or ISAs, recently tested by the University of Utah, Purdue University, and a few other institutions. ISA loans tie student-loan repayments to income, thereby easing the initial burden of loan repayments for new graduates trying to establish their working careers. ISA loans, however, are still loans; ultimately, they just delay the same cost burden and usually balloon in the latter years, assuming that salary increases will be reliable enough for borrowers to outpace — or at least keep up with — the increasing monthly payments and pay back the loan on a defined timeline.
If we think of the college degree as a lifetime asset qualifying graduates for a remunerative career, then a cost-recovery plan similar to monthly or annual ISA repayment schedules makes sense — but on a working-life basis at a low percentage of pre-tax income, rather than on a preset loan-repayment schedule.
Those payments will always stay in step with a graduate’s income level, thereby keeping spells of unemployment, career changes, and exits from the labor market from trapping graduates in careers that they may have innocently chosen at the age of 21. Students who graduate and are unemployed have no financial obligation to repayment; if they go on to become millionaires, then a small proportion of their income goes a long way in contributing back to the university, compensating for those who are unemployed. The vast majority of graduates will be in the middle. Students’ annual contributions might be seen as a kind of continuing “tax” throughout their careers in exchange for their “tuition free” degree that launched their professional trajectory.
For many students, this is a better option than the status quo. Under the current model, a graduate who has incurred $48,000 in educational debt while earning a four-year degree would pay about $400 per month over 15 years (estimating the annual interest rate on federal loans at 6 percent). Under an infrastructure model, that graduate would instead pay a small percentage of their income, say 4 percent. For someone earning $54,000 a year — the average starting salary for an LSU graduate — that works out to $167 per month. For someone earning $100,000 a year, it’s $333 per month. To be sure, the infrastructure model requires graduates to continue to pay for their education over a longer period than traditional student loans. But with time, the influence of that 3 percent to 5 percent of income on a graduate’s quality of life decreases steadily.
Most importantly, debt-repayment stress will not limit graduates’ professional choices. The current student-debt model has turned a unique, complex experience of intellectual, professional, and personal growth into a job-training boot camp. A public-infrastructure approach would give graduates the freedom to pursue the careers they want, instead of forcing them to pursue jobs in which they are uninterested just so they can cover the costs of their education loans. And it would allow more first-generation college applicants to see higher education as a viable financial option — they wouldn’t need to risk financial disaster in seeking a credential that no one in their family has experience attaining.
Of course, this is a hypothetical, simplified model. Implementation would involve additional complications. Most immediately, the riddle of controlling for adverse selection — in this case, the possibility that the model is applied only to those with the least lucrative career prospects, or that those with financial means are easily able to exit the pool of students under the program — must be solved, as is true of any system for pooling risk.
Despite such important questions, the economic fundamentals of treating higher education as infrastructure are sound. Universities have been saying for decades that college is a worthwhile investment, and it is time for public universities and their supporters to put money behind these claims. If they don’t, it is only a matter of time before other kinds of investors, less committed to education and to students, will.
