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No Money Down!

February 2, 2012

With public university administrators continually arguing for tuition increases to counter state appropriations cuts, it seems far-fetched that their budget problems could be solved by eliminating student tuition and fees altogether.

But that’s the idea put forth by a group of students from the University of California at Riverside, who in January proposed a new funding model for the University of California system that seeks to solve two of the system’s biggest problems: unpredictable and large decreases in state appropriations, and the steady increase in tuition costs.

Under the students’ plan, called the UC Student Investment Proposal, students in the system would pay no upfront costs for their education but would agree to pay 5 percent of their income to the system for 20 years after graduating and entering the workforce.

Student Proposal In Brief:

UC students would pay no tuition up front to attend a UC campus.

UC students would agree to pay 5 percent of their income for 20 years of employment after graduation.

Payments would only be collected while students were working, not while students attended graduate school or were unemployed.

Percentage reductions would be granted to students who transfer into the system, enter public service fields, and/or stay in the state.

“Rather than dealing with short-term issues, we wanted to develop a long-term fix for the system,” said Chris LoCascio, a junior at UC-Riverside and president of the group, Fix UC, that came up with the proposal. “Right now UC is living paycheck to paycheck with an unreliable donor.”

This might sound like a well-intentioned idea that isn't going to excite anyone but a few activists. And it's true that the proposal faces logistical and political barriers. But system President Mark Yudof, who in the past has defended large tuition increases, commissioned two of his top lieutenants – Nathan Brostrom, executive vice president for business operations, and Patrick Lenz, vice president of budget – to meet with the students behind the proposal and evaluate its viability. "We think the ideas are constructive," Yudof said at the Board of Regents meeting Jan. 18.

While much of the focus is on how dramatically the plan would change the university’s financial model, the plan also represents a significant shift in the philosophy about paying for higher education and the nature of financial aid. Not only does it shift the time at which payment is expected, but it removes the burden of paying tuition from a variety of stakeholders – including families and state and federal governments – and places it almost entirely on the shoulders of students.

Many say that, even if the proposal proves infeasible, getting students – and, really, anyone – to think about new models of funding higher education is a victory. At a time when many administrators talk about how the old financial models are broken, and how new models need to be developed, there have been few novel ideas put on the table.

The plan also breaks with the traditional type of income-based program. Such efforts are usually only for those students who borrow money; this approach would apply to everyone, so the student with a trust fund would assume the same long-term obligation as the student currently on work-study.

‘An Unreliable Donor’

Like many states, California has grappled with significant decreases in tax revenue brought on by the economic downturn, as well as increased pension, public safety, and health care costs, all while facing stiff opposition to tax increases. That combination has meant less money for colleges and universities. In the past five years, state support for higher education in California dropped from about $11 billion to about $9.6 billion. Between 1999 and 2009, per-student state support for the University of California system dropped 54 percent in inflation-adjusted dollars, from $16,430 to $7,570.

At the same time, in-state tuition has nearly tripled, increasing from about $3,900 in 2001 to $13,200 this year. The 2011-12 school year was the first time that tuition made up a larger percentage of the system’s overall budget than state appropriations. Administrators argue that tuition is one of the only revenue streams they can increase to make sure the university has enough money to maintain quality.

Administrators have been open about the fact that they don’t see state appropriations returning to previous levels, nor do they see tuition decreasing. But the public has been vocal about its opposition to continual tuition increases. Last year administrators backed off a proposal that would have increased tuition 16 percent annually if the state did not provide “sufficient” appropriations.

The Proposal:

LoCascio, who is editor-in-chief of the student newspaper The Highlander, said the proposal grew out of talks on the paper’s editorial board about tuition increases. He said the board wanted to start a discussion about how to avoid increased tuition, not necessarily how to kill tuition altogether.

“When we started out, our primary goal was to initiate a conversation and spearhead an effort to come up with an out-of-the-box solution,” LoCascio said. The project took on a life of its own, and LoCascio said he and others worked through the summer, fall semester, and winter to iron out the details of the proposal. The group released a detailed proposal the week before the Board of Regents’ Jan. 18-19 meeting, which received significant press coverage.

To phase in the program without decreasing revenue, the proposal calls for initially applying the plan to students on UC’s Blue and Gold Opportunity Plan, a program that covers expenses for students whose families make less than $80,000 a year and who qualify for financial aid. Revenue from those students would cover the expansion of the plan to other students. Fix UC predicts that the program, by its 20th year, would triple the amount that the system currently generates through tuition.

The proposal would also encourage certain behaviors. The expected contribution from students who stay in-state would be 0.5 percentage points less than for those who leave. Students entering the public sector and those who transfer into the system would pay 1 percentage point less, even on presumably smaller salary bases. Out-of-state and international students would pay 1 percentage point more than their in-state peers. Housing would also be incorporated into the program. Students would pay 0.65 percentage points more per year of living on campus, which would be paid for the first 10 years of the students’ obligation.

Many say the major barrier the plan faces is how the system would collect payments from alumni, many of whom leave the state. How the system will track students, what is counted as income, and how the system accounts for various types of tax loopholes are all issues the system would have to resolve before pursuing the plan.

“All these things are easy to say, but when you come right down to calculating what in fact is due, some significant questions arise,” said Bruce Johnstone, a former chancellor of the State University of New York who researches higher education finance. “These are not insurmountable questions, but the idea is much more technically difficult than it looks.”

Getting other universities and state governments involved in a nationwide plan, or getting the federal government involved, could ease adoption of the program, since collecting payments through employers in the same manner as payroll taxes would eliminate a logistical hurdle. “It seems unwise to do on an institution-by-institution basis,” said David Breneman, an economics professor at the University of Virginia who researches higher education policy.

What’s Out There

Policy experts – many of who said the Fix UC proposal is unlikely to gain traction because of the logistical barriers – said the plan resembles income-contingent loan repayment, an idea that has been around for some time for some U.S. student loans and has been tried in Australia and Britain.

In Australia, repayment for government-supported student loans is based on a sliding scale that varies with income. In Britain, students also take out government loans, but pay them back at a rate of 9 percent of whatever they earn above £15,000 ($23,800) in a tax year. Payments continue until the loan is paid off or until 25 years, even if the loan is not entirely paid back.

While the Fix UC proposal shares characteristics with these plans, particularly basing payments on income, it is not identical. For one, the Fix UC plan is not a loan program. There is no finite amount that students would be responsible for paying back. If a student makes $20,000 a year for the 20 years of his obligation, he would end up paying a total of $20,000, far less than one might expect to pay for college and would be obligated to pay for a traditional loan. But if a student makes $100,000 for 10 years after graduating and $400,000 for another 10 years, he would end up paying $250,000 total, significantly more than the current cost of UC tuition.

The UC plan, as the students proposed it, also cuts out the federal government’s role as a broker for the loans.

Yale University adopted a similar post-graduation payment system in the 1970s. Under that system, cohorts of students were responsible for paying a certain total amount. Within the first few years of leaving Yale, however, students with large incomes were allowed to pay off their loans immediately. So students who made enough to pay back their loans did, leaving it up to the low-income graduates to pay the rest. The university abandoned the program after only a couple of years. LoCascio said the Student Investment Proposal, at this point, does not provide an option for paying up front or paying some component early.

Part of the reason students in England wanted the post-graduation payment structure was to grant students a degree of freedom from their parents, Johnstone said. If parents were paying tuition, they had some authority over the decisions students made in college. Under a post-graduate payment system, students become independent.

A Philosophical Shift

Like the UK system, and unlike tuition proposals that have been thrown out in recent years, the Student Investment Proposal would be a sea change in how the public views paying for higher education.

“Beyond its practical application as a real long-term solution to the University of California’s current revenue system, one of the goals of the UC Student Investment Proposal is to encourage a shift of thought about the education students receive by attending the university, and their relationship with the university after graduation,” the proposal states. “Students will begin to think about the value of their education and its significance in the trajectory of their life from graduation to retirement.”

In the current system, families, particularly wealthy families, play a huge role when it comes to paying for college. Joni Finney, a professor at the University of Pennsylvania Graduate School of Education who studies the public finance of higher education, said the idea of getting students more involved in paying for college is not necessarily a bad idea. “But that shouldn’t preclude the idea that if your family can afford to contribute to your educational costs, they should also make a contribution now,” she said.

The plan would hugely benefit high-income families that currently pay full price to attend the institution, since parents would no longer be expected to pay large up-front costs. It would also dramatically increase the cost for students who come from low-income backgrounds, many of whom pay essentially nothing for higher education because of financial aid programs.

At the same time, however, students who come from wealthy families would still have to pay out over time. If they and other students choose to enter high-paying fields, they will likely end up paying more to the system over time than their peers who opt for careers as teachers and social workers. While it is not exactly a progressive tax, it is a policy that would ask significantly more of the wealthy in pure dollar terms than does the current system. And while low- and middle-income students might end up paying more in tuition over time than they would under the current model --  particularly if they enter high-income fields -- they wouldn't have to pay anything up front, which could improve access to the system. They also wouldn't see cuts to course sections, small classes, and academic and student support services -- reductions that are becoming all too common in the university system as it struggles to stabilize its finances.

Another fear policy researchers raised is that shifting the burden towards students would further increase the perception of higher education as a private good designed to help students get jobs. A revenue flow the size the Student Investment Proposal imagines could drive the state to further decrease support. For the 2011-12 fiscal year, about 4.5 percent of the state's overall appropriations went to the UC system. The proposal calls for the state’s contribution not to fall below 2 percent of the state budget, but there is no enforcement mechanism to ensure that the state holds up its end of the bargain.

While states can be unreliable partners in funding higher education, Finney said, there is a philosophical purpose for public higher education. “It is crucially important to keep the state in the game,” she said. “We have to remember that there is a public purpose in educating people, and the state needs to commit resources to that.”

Others said the idea that paying for higher education is a collective enterprise is a nice ideal, but much of the country has already adopted the private-good mindset. The College Board’s annual reports on tuition and financial aid released last fall detailed a significant trend away from state support toward students and their families, with the federal government providing support in the form of grants, loans, and tax credits.

“The idea of education as a public good has been under attack for a long time,” said Richard Staisloff, principal at RPK Group, a finance consultant for colleges and universities. “In some ways we have to accept the view of it as a private good. Higher education is students investing in themselves, so they need to be the most important stakeholder in making that happen.”

LoCascio said he and UC administrators are also looking for a way to ensure that the system still captures revenue from the federal government in the form of student loans, potentially by having this money cover other expenses.

UC administrators and the students behind the proposal will likely report back to the Board of Regents at the board’s next meeting in March. Administrators in the system hope the profile of the proposal will spur students, faculty members, and others to propose alternative solutions.

“Even if the proposal doesn’t make it into prime time, maybe it will encourage other people to take another look at how we fund higher education and come up with new ideas, because the current situation where the university is starved by the state government is untenable,” said Dianne Klein, a spokeswoman for the president’s office.

 

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