Market Based Approach to Lower Tuition Costs

With the costs of higher education rising and almost a third of the outstanding $1.2 trillion in student debt in default, it’s time for imaginative solutions. One of the more promising ideas comes from Oregon, where the state senate this summer passed a bipartisan bill to test a new system called “Pay It Forward, Pay It Back,” says Dave Girouard, former president of Google Enterprise reported in the Wall Street Journal.

Students attending public universities in the state would pay no tuition at all. Instead, they would commit to repaying 3 percent of their income for the next 20 years into a fund that would support the next generation of students.

What’s not to like about “pay it forward” plans? If they are not done right, the answer is “much.”- The first issue is that a pure pay-it-forward model allows schools to avoid coming to terms with the rising costs of higher education and student debt.

– Universities have little incentive to keep either of them under control as they benefit from an overly generous lender — the U.S. government.

– Students today take on debt for degrees that are unlikely to offer the earning potential necessary to repay their loans.

– Pay it forward does nothing to encourage students to focus in areas with high earning potential, such as engineering and computer science.

There is a better market-based approach that can better align interests and incentives of students and schools. Instead of a blanket repayment rate — such as Oregon’s 3 percent — why not let students earn discounts from that loan rate by choosing majors with strong career prospects? Or by studying hard to get the grades that will attract potential employers?

– Students would be properly motivated to pursue degrees that provide a strong economic future. And colleges would have some accountability for the quality and value of their degrees.

– Schools that want to attract the best students would be forced to better align the cost of their degrees with their earning potential.

– For careers such as teaching that have a large public benefit without the monetary payoff, it would be smarter to subsidize the degrees required for these fields.

Pay it forward is undoubtedly appealing. But a market-based approach would help students choose the institutions and programs that will serve them best, and undertake one of the largest financial obligations of their lives.

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