Let’s make paying for college harder
I was disappointed with Obama’s retraction of the tax benefit for college savings, referred to as the “529 plan.”
And, although some would claim that the 529 tax shelter was used by more than rich or very well-off people, it’s still a very lopsided regressive tax, because the majority of Americans can barely scrape by on their income, never mind saving for their kids’ college funds. But that’s not exactly the point I’m trying to make, although it’s a very important point.
The larger point is this: whenever we make college more affordable by helping people pay for college, it just makes college more expensive. Tuition rises to meet our new-found ability to pay. And although I can’t prove causality for every tuition hike, the data kind of speaks for itself:
versus here’s the federal aid growth:
The result of our federal loan programs, which were started with good intentions, is that whereas before college was out of reach for lots of people, now it’s still out of reach, they go anyway, and then emerge loaded with debt. It’s not actually a huge improvement for the vast majority of the middle class, but it’s become a requirement to get a reasonable job so people are forced to go through it, kind of like a hazing ritual.
There’s another related reason why college tuition goes up, namely because we have stopped funding state schools, so their tuition is higher, and the other colleges also rise to meet them. But part of the reasoning behind that is because we have all these federal loans available, so why would we need to fund the state schools.
We need to put into place ways for tuition to go down. First, we make paying for college harder, and that includes for upper middle class folks. The reasoning is this: if you’re the only person having trouble paying for something, that’s bad. But if everyone has trouble paying for something, the price goes down.
Second, we make state schools much cheaper, or even free, by funding them.
mathbabe 
This won’t fit in the comments section–think I’m going to have to put together a counter-post titled “I love you Cathy, but 529 Plans are awesome.”
FoW
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Let’s do this!
On Mon, Feb 2, 2015 at 6:57 AM, mathbabe wrote:
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I think I might think 529 plans were at least a decent middle-class benefit if the IRS clawed back the subsidies (under something AMT-like) from the very-wealthy. Currently, the benefits are very much concentrated in the top income bracket. I can see no downside to scrapping the 529 and replacing it with a refundable education credit, or with education accounts tied to a sovereign wealth fund. (I’d also be happy to trade 401(k)s and their equivalents for shares of a sovereign wealth fund.)
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The same thing happened in healthcare. A few short years ago a doctor could by an Electronic Medical Record program or Practice Management program for around $5000. After meaningful use kicked in and doctors started getting upwards of $44,000 for implementing a certified EMR, the prices of those programs shot up like rockets. Now they are $20,000 or higher in many cases.
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So progressive economics comes down to “Let’s screw everybody?” I just don’t get the logic.
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Actually, the goal would be to starve the colleges.
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The problem is that the reverse could occur. While colleges raise tuition as more money from customers is available, the colleges can’t just lower tuition later on. Colleges purchase more equipment that requires more maintenance, hire more professors who then get tenure and cannot be fired, and start more programs. Therefore, when less money suddenly becomes available, the colleges may then RAISE TUITION HIGHER STILL to make those who are able to go pay even more to cover fixed costs. Hotels, for example, do this in some areas. Rates may go up in the off season because the hotels still have to have a base income to cover fixed operating costs. So when fewer patrons come in, those fewer pay more to help make up the difference. Supply and demand can be counter-intuitive.
JamesNT
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Certainly that’s what happened to Cooper Union. The administration stupidly took on massive debts to finance investments in things it didn’t really need, and then when it faced a fiscal crisis, it passed the cost of its mistakes on to its students.
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This seems inconsistent.
“Tuition rises to meet our new-found ability to pay. ”
And
“There’s another related reason why college tuition goes up, namely because we have stopped funding state schools, so their tuition is higher, and the other colleges also rise to meet them.”
If colleges are going to charge as much as they possibly can, then funding schools won’t reduce tuition.
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Just two separate effects, which as I said are linked by political rhetoric.
On Mon, Feb 2, 2015 at 10:58 AM, mathbabe wrote:
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I think this requires more careful analysis, and I’m not sure that making it harder to pay for college will help. If we make it harder to pay for college, then it is expensive and obscure private schools that will be squeezed first. More kids will have to (try to) go to public schools, and this might make their tuition rise further. I think the main reason tuition has sharply risen at the public school that I work at is that state support is declining while at the same time enrollment keeps growing.
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As others have said, this post seems a little confusing and at times even self-contradictory. But I think what you’re trying to get at is this, put in the simple econ101 type framework of supply and demand curves:
If government tries to subsidize college education on the demand side by giving grants or loans or tax breaks, it essentially just increases the amount that people are willing to pay (to whatever they were willing to pay before, plus the subsidy). So this moves the demand curve, meaning we get some combination of increased prices and increased supply. And as supply is relatively constrained, especially for elite schools*, it will mostly be the former.
On the other hand, if the government subsidizes college education by providing cheap or free public schools, it moves the supply curve, which should result in lower prices and more people going to college, which are the desired outcomes.
*In a more detailed analysis we could look at different types of colleges separately, as Harvard and the University of Phoenix aren’t really in the same business. At the high end, supply is fixed, so we should expect prices to just go up. At the lower end of colleges that are more or less vocational schools (or in some cases, little more than scams), there are fewer barriers to entry, and between the ubiquity of government-guaranteed student loans and the de-funding of community colleges, we should expect an increase in the number and size of for-profit schools taking advantage of the system. And in both cases, that is exactly what we have gotten over the past couple of decades.
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Thanks!
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I’m unclear whether you’re saying you’re disappointed with Obama’s retraction of his plan to scale back 529s, or with his plan to “retract” 529s in the first place? Possibly first couple paragraphs need editing?
“it’s become a requirement to get a reasonable job so people are forced to go through it, kind of like a hazing ritual.”
More like the ritual application of a collar that marks you as an indentured servant. The first decade of a middle class citizen’s adult life is spent, in large part, paying the Lords of Capital the cost of entry to the job market.
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BTW, didn’t Jordan write a piece suggesting that if you took all of the money we currently spend subsidizing private higher ed, you could, even at today’s public university tuition prices, basically make them all free?
OK, yes, I’m remembering that right. It was in the Atlantic:
http://www.theatlantic.com/business/archive/2014/01/heres-exactly-how-much-the-government-would-have-to-spend-to-make-public-college-tuition-free/282803/
http://www.theatlantic.com/business/archive/2013/03/how-washington-could-make-college-tuition-free-without-spending-a-penny-more-on-education/273801/
It’s articles like those that make me think his lapses in judgment on issues like how marriage affects lifetime earnings are not irredeemable. 😉
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Good story. Better yet, the government should make tuition free as France and now Germany and other European countries do. But then, the richest of the rich might have to pay a penny or to more, and we all know how incensed they become about anything eleemosynary…
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(a penny or two more)
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That’s a great word! Though, speaking as somebody who’s high enough up the family-income scale that if I got my desired policy regime I’d pay significantly higher taxes than I do right now, I think it’s silly to think of investing in making education widely available to the smartest students, no matter how well they picked their parents, as charity. Even if you’re a hard-nosed capitalist, you should want to have a smart possible workforce available to hire from. (I’m more of a squishy-nosed capitalist, myself.)
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Just a reminder: The amount due in income taxes is a floor. There is no ceiling. So feel free to pay as much as you want above that floor. It’s unfortunate, though, that you cannot direct where that excess tax would be used.
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If I were just voluntarily increasing my tax contribution (even if I could direct it) that *would* be merely eleemosynary. Even if Warren Buffett or Bill Gates decided to dedicate his fortune to some national project, we’re an awfully big country these days. Making a dent in our serious problems will require coördinated action across the whole society.
I want us to democratically agree on re-jiggering our tax system to make it somewhat more progressive, to somewhat re-allocate total money income, such that the aggregate of decisions on what dollars get spent where becomes a little more democratic. People seem to forget that the allocation of money acts not just as the apportioning mechanism for the stuff that’s produced, but also, much more importantly, as a mechanism of “voting” on what should be produced in the first place. If you think that in general it would be beneficial for the economy to produce more education services (and thus more educated workers), and fewer yacht skippers and private plane pilots, the easiest solution is to make sure that there are enough dollars in the hands of people who’d like to buy of education services, that the market draws in skilled workers interested in meeting their demand. Same with grade school ed — make teaching an attractive, well-paid, high-status profession, and the best and brightest will compete to become teachers.
Consider this Keynes’ revenge on Say. To a certain extent it is true that supply can “create” demand, by offering a good that nobody knew they wanted at an attractive price. But it’s just as true that demand can “create” supply, over a time-scale of years, by offering anyone willing to invest the time in developing appropriate skills an opportunity to make a good living (and a few of them a chance to get rich).
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Of course the higher-ed market has cartel issues, separate from any quantity-supplied/demanded issues, and also has perverse incentives to compete on amenities rather than actual quality of education. (Partially this is that we lack objective metrics to measure quality of education.)
Still, it’s pretty clear that currently, we have a system where the top couple tiers of colleges are priced to match what the ultra-rich can pay in cash, and then the rest of us borrow from the ultra-rich (indirectly, through student loans, which are issued by financial institutions whose stock and bonds pay the ultra-rich). A world where incomes where flatter — where a CEO typically made 30x his average worker’s pay, rather than 300x — would likely be a world where tuition was significantly lower, but where most families could afford to send their kids, without putting themselves in hock for a decade.
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The following statement has some factual issues:
“the top couple tiers of colleges are priced to match what the ultra-rich can pay in cash, and then the rest of us borrow from the ultra-rich”
The ultra-rich can pay in cash much more than top-tier tuition. Just look at the apartments they buy in Manhattan.
The top-tier schools have programs for the very poor not to pay anything, and often are given a stipend.
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“A world where incomes where flatter — where a CEO typically made 30x his average worker’s pay, rather than 300x — would likely be a world where tuition was significantly lower,”
Such worlds do exist, but they don’t create the type of innovation we see in the USA. Yahoo, Google, Microsoft, Apple, etc. 300x is a strong motivator for risk takers. So I don’t begrudge their salaries.
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Regarding my statement that you consider to have factual issues: Refer to Cathy’s figure in the original post. Tuition inflation has tracked the separation of top-tier incomes.
Regarding who takes risks: There’s plenty of innovation in countries with progressive taxes and strong safety nets, and there’s a fair bit of evidence that a safety net that’s there to catch you if your risk goes wrong encourages risk-taking.
http://www.bloombergview.com/articles/2015-01-26/social-safety-net-business-startups-and-risk-aversion
http://www.inc.com/magazine/20110201/in-norway-start-ups-say-ja-to-socialism.html
We in the US innovated plenty back in the ’50s-’60s, when we had MUCH steeper taxes. I personally think it’s probably true that the Eisenhower 90+% rate was too high — that it encouraged so much tax avoidance strategery that it was counterproductive. OTOH, there’s a theory that the combination of steep taxes on corporate profits, and on dividend-recipients’ incomes, encouraged large companies to instead re-invest and take risks on blue-sky research.
http://www.slate.com/blogs/moneybox/2012/07/24/xerox_parc_and_bell_labs_brought_to_you_by_high_taxes.html
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Different types of innovation. Incremental vs transformative. Just look at the market capitalization of today’s innovative companies vs those of yesteryear. And yesteryear there were plenty of comparable companies in other countries. Today only China’s Alibaba comes closest – for other reasons.
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You think no transformative innovations came out of corporate research centers like IBM’s TJ Watson, Bell Labs, Xerox PARC, and Lockheed Skunk Works, during the high-tax ’60s and ’70s? Really? And you’re going to dismiss the many pharmaceutical, chemical, and electronics innovations that have come out of Europe in the last three decades as merely incremental? Norway’s StatOil is doing a lot more than any of the US companies to innovate in the area of safe deep-ocean drilling. (IIRC, the catastrophe in the gulf was in part due to the use of equipment that the Norweigians consider obsolete — like, it’s illegal to use in their territorial waters.)
I think it is quite difficult to make an ironclad case either way, as to whether higher taxes on the upper echelons of income, and more social insurance / flatter distribution, encourage or discourage risk-taking and innovation. But there’s plenty of evidence in favor of “encourages”, both in US history and in modern Europe.
Alibaba seems to me more like an example of a company that’s incrementally improving on existing models (Amazon, eBay).
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The focus on tuition increases not only oversimplifies
higher education economics, but invites suspect
framing (e.g., the mystical market talk).
To illustrate just a part of the “tuition problem,” data
from the State Higher Education Executive Officers
Association (SHEEO)
(http://www.sheeo.org/resources/publications/shef-%E2%80%94-state-higher-education-finance-fy12)
provides and introduction to shifting the foci.
SHEEO reports annual data on enrollments (full-time
equivalent [FTE] students), state appropriations and
tuition costs in constant 2012 dollars per FTE student
at public institutions.
To illustrate I use the first year of the data, 1987, and
the last, 2012. From 1987-2001:
-FTE students increased by 62.1%
-Total Appropriations increased by 12.8%
-Appropriations per FTE decreased by -31.4%
-Tuition per FTE increased by 100.5%
The decrease in state appropriations: $2,581 per FTE.
The increase in tuition: $2,601 per FTE
These data would suggest that in the realm of public
institutions the rise in tuitions has in effect replaced
the loss per FTE of appropriations.
Data such as cited here, though not complete, suggest
more care in problem specification. How to build
time series, some with estimates, looks to be one of
the preliminary tasks. Meanwhile, policy talk appears
premature.
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That’s not inconsistent with what I said, and it’s only explaining the state school tuition increase.
On Mon, Feb 2, 2015 at 7:09 PM, mathbabe wrote:
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Over the last almost fifty years, tuition inflation has been ridiculous. When I first went to the University of Michigan in 1965, the tuition for full-time, in-state was something like $217 a semester. Something has to give. I agree with your assessment that the government aid has just allowed universities to continue to hike tuition because students have a way to pay it.
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I seriously doubt that making tuition even less affordable would result in people willing to pay even more in taxes so that state (and city) universities would be more fully funded.
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I disagree with Cathy for a few reasons.
1) There’s not much money to be had taxing 529 plans compared to other possible revenue sources according to FiveThirtyEight.com (tinyurl.com/m7khft8). The government would only net around $2B in taxes — chump change in a $4 trillion budget;
2) Admittedly, 529s are not a great idea to begin with: http://theweek.com/articles/536319, so maybe the thing to do is eliminate them altogether. Even so, they’re what we have for now, so don’t tax them out of existence;
3) If you’re taxing the middle class to help the lower-middle class, you’re “scraping the bottom of the barrel” to quote Megan McArdle from Bloomberg (tinyurl.com/lhk6f9e).
Where I do agree is that college should be made more affordable, or even free!
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Related: A piece by Mike Konczal a few months back, “The UNC Coup and the Second Limit of Economic Liberalism.” Link = http://www.nextnewdeal.net/rortybomb/unc-coup-and-second-limit-economic-liberalism
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Well, nobody has mentioned the Baumol Effect, so I’ll do it. See https://en.wikipedia.org/wiki/Baumol%27s_cost_disease
Globalization matters, too. Jobs that cannot be offshored should pay relatively more than jobs that can be. So service jobs should see wage increases. We see that with administrators and college profs. We do not see it with low level services, because of the army of the unemployed.
The rising cost of college is a systemic problem, and simply reducing subsidies is not likely to be enough. Doing so may even make college a luxury good, which the well to do can happily afford. The result could be closing of state and community colleges. The elite do not really want an educated proletariat.
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“The elite do not really want an educated proletariat.”
You have data or facts to back up this assertion?
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See https://michaelperelman.wordpress.com/2009/12/08/a-rationalization-for-educational-downsizing/
Check out the Freeman quote. Then ask yourself why college loans are so resistant to discharge through bankruptcy, why so many students have to take on debt, and so on. Of course there is deniability, but not only do you have statements such as Freeman’s, you have results that are consistent with that attitude.
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So no data or facts, just opinion.
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That’s rich, coming from someone who just threw ‘transformative vs. incremental’ out there. Why do I get the impression your big strategy is always to put the burden of proof on the other person rather than follow conventional evidenciary standards?
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Highway Fatalities and Lemons
http://ssgreenberg.name/PoliticsBlog/2009/04/03/diversion-highway-fatalities-and-lemons/
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Interesting discussion. Here in Australia, our current government seems to have come to the conclusion that tertiary education is an important class marker – if poor people get degrees, for example, it can be hard to discover they didn’t go to an expensive private school. Hence, they are trying to make tertiary education more expensive, so only those who deserve wealth obtain one again.
So it’s kind of funny to hear about governments accidentally making education more expensive.
Of course, they are very busy handing out knighthoods to princes and fighting each other, so they may not get around to implementing their plan.
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