Income-based pricing of College Degrees

Penn State University has the third highest in-state tuition in the country. Some 60% of its graduates carry a student debt of almost $37,000, which is well above the national debt average. The university food bank called the Lion Pantry remains a grotesque reminder that some Penn State students cannot afford to eat properly. Every year, for half a century, the cost to attend Penn State University has increased. But this academic year marked a turning point. Ignoring the recommendation of the finance committee, President Eric Barron announced a freeze on in-state tuition at Penn State. With this action he did more than ease the financial burden that college education imposes on many Pennsylvanians.  His decision also reveals where the effective locus of responsibility lies in lifting the more than trillion-dollar yoke of student debts.

This Presidential election season has spurred a flurry of political proposals to address the problem. For example, Bernie Sanders wants to make public colleges free by taxing Wall Street. Hilary Clinton proposes to reduce the interest rates on student loans. By pegging loan payments to the income they earn, President Obama has made it easier for indebted students to repay their loans. Each of these arguably reasonable proposals only addresses the ability to pay. But, student debts are the result of two interrelated factors—the cost of tuition and the ability to pay it off. In recent decades, tuition costs have increased at rates exceeded by only that of healthcare costs. Unfortunately, none of these proposals contain effective measures to control the cost of higher-education.

Elizabeth Warren’s plan requiring colleges to share the risk of students defaulting on their loans is a notable exception. However, even this attempt to align the incentives of colleges with that of student interests does not go far enough. Colleges can simply raise the tuition to cover their expected share of defaulted loans. Warren is right in thinking that holding colleges accountable for the service they offer is the linchpin of any solution to mushrooming student debts. And, as Eric Barron’s executive action shows, university administrators are the ones who decisively control tuition costs. Neither students nor faculty, much less government bureaucrats, decide on the nature and size of expenditures incurred in a university.

A lasting solution to the problem of mounting student debts will not be found unless both rising tuition costs and the relative inability to pay for them are dealt with simultaneously. After all, even if college education were free to the student, few would argue that tuition should continue increasing. Moreover, any such solution must enroll the singular capacity of university administrators to control costs.

In order to effectively end the crushing burden of student debts on Americans, college degrees should be priced as a function of the income they generate.  Unlike Obama’s income contingent repayment plans, such income-based pricing of college degrees will impose a ceiling on tuition prices, thereby dramatically reducing the likelihood of unpayable student debt. Moreover, university administrators facing a maximum they can charge for a given college major will have to find innovative ways to control costs.

Courageous administrators could implement income-based pricing of college education by spearheading the creation of a dataset containing, at least, the following audited information. First, EdU discloses the graduation rates, kinds of jobs held, and average earnings for every major it offers. Second, federal government and relevant public data are summarized documenting the mismatch between the demand for and supply of college grads in different occupations. Third, though experience surely outweighs the value of a college credential, economic data is used to specify the years of a career over which the benefits of a college degree can be expected to last. Fourth, a baseline is chosen for the amount of annual discretionary income to be set aside for repaying student loans. The Department of Education recommends 15%.

With such trustworthy data, perhaps prepared and maintained by a consortium of accounting firms, it would be a fairly simple matter for college administrators to manage educational resources efficiently and for students to choose wisely. The precise numbers and factors used above could be debated. But the principle should hold. Assume Susie wants to get a degree in biology. She finds its total cost at EdU, adjusted for its graduation rates. A few clicks later, she discovers the income she could make over a high-school degree, adjusted for placement rates. If the tuition exceeds 15% of her expected additional income over the portion of her career the benefits of her college degree will last, then EdU is overcharging for its biology major.

Regardless of who pays for it, with income-based pricing of college degrees, buyers know which colleges and majors don’t offer value for their education dollar. More importantly, college administrators have a benchmark against which to manage the cost of higher education. They should prefer reining in costs to having to explain why the college degrees they confer are not worth the price. There are two other consequences of income-based pricing of college degrees. First, it does not deepen the already unconscionable levels of economic inequality in America. Both rich and poor can obtain a college degree that is cost-effective. Secondly, it does not deepen the existing discrimination against the humanities and other non-technical fields of study. In pursuing cost-effectiveness, administrators would discover that the humanities subsidize the technical fields. Anecdotal evidence suggests an engineering major consumes nine times the educational resources that a philosophy major does, though both pay roughly the same price for their degrees. The conventional wisdom that the STEM (science, technology, engineering, medicine) fields provide the best educational value for money would have to be fundamentally rethought. Crucially though, income-based pricing of college degrees would free Americans from the fear of financial ruin to pursue whichever area of study that stimulates their intelligence and ignites their passion.


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