The Worst Argument So Far Against Oregon's Higher Education Proposal

Last week, I wrote about Oregon's tentative moves towards implementing a Pay It Forward (PIF) system to eliminate college tuition at Oregon's public schools. Under these kinds of plans, college attendees are made to pay a percentage of their income (just like a tax) after they graduate. Since then, the Oregon plan has blown up, receiving coverage in almost all the major outlets. The coverage has produced dozens of distinct arguments from people all over the political map. It would be impossible to address them all in-depth. However, there is one argument against the plan that is so bad that I think it deserves an answer. This post goes a bit into the weeds to make its point, but stick with it: there is a big payoff.

The argument goes like this. If a state Pay It Forward (PIF) system is implemented, there is a narrow group of students (who are not high-earners) that would actually end up worse off than they are in the status quo. How could this be? Well, the federal government has an opt-in repayment option -- now called Pay As You Earn (PAYE) -- that allows student debtors to pay 10% of their discretionary income for 10 or 20 years, after which their remaining debt balance is forgiven (although they bizarrely still have to pay income taxes on the forgiven amount). In the status quo, students that opt in to PAYE pay the 10% and that's it. However, if a state passes PIF, those same students would pay the 10% for PAYE and then an additional percentage of their income (e.g. 3%) into their state's PIF system. So, you see, they wind up worse off, and therefore states should not adopt a PIF system.

This argument has been put forward by a number of very smart people that I respect. Sara Goldrick-Rab made it in a post at The Century Foundation, Jordan Weissman made it in a post at The Atlantic, and Dylan Matthews quotes Jason Delisle of the New America Foundation making it in a post at The Washington Post.

On its face, this argument seems very appealing (hence all the smart people reaching for it). In fact, however, the consequences of this argument are so bad that I am surprised nobody has pointed out yet how problematic it actually is.

The only reason this argument works is because students that opt in to the federal PAYE system (and utilize it all the way to debt forgiveness) receive absolutely no benefit from direct tuition subsidies. They don't pay tuition, after all: they pay 10% of their discretionary income for 10 or 20 years. Therefore, any direct tuition subsidy paid by a state is worthless to them. In fact, it's not just that tuition subsidies are worth $0 to them; it's that direct tuition subsidies harm them because they are forced to contribute to them in some way.

So in the PIF system that is the target of this popular argument, the state directly subsidies all tuition, and those those that utilize the colleges have to pay (what amounts to) income taxes in order fund that direct subsidy. This is bad for students in the PAYE system because they receive $0 in benefit from the direct tuition subsidy, but have to pay in to the system that funds the tuition subsidies. So, in net, the whole enterprise of providing tuition subsidies via PIF makes the PAYE graduates worse off.

But this is not an argument against PIF: it is an argument against states providing tuition subsidies at all. Consider the following scenario. Suppose we are in Wisconsin, which provides subsidies to its public colleges, but certainly not enough to cover tuition. How does it provide these subsidies? It taxes the public. Now suppose Wisconsin passes a bill that increases taxes somewhat in order to increase subsidies to public colleges somewhat. If you follow Sara Goldrick-Rab, the author of The Century Foundation piece linked above, you'd know that she supports this move. But actually, if she really believes her argument against PIF, she should oppose such a bill. Why? Because the bill makes PAYE students worse off! Those PAYE students will get $0 in benefit from the increased WI tuition subsidies, but, because they are taxpayers too, they will face higher taxes after they graduate (in order to help fund the increased higher education subsidies). In net then, PAYE students would take a hit financially.

In their desire to argue against PIF, its opponents have actually managed to construct an argument that, when taken to its logical end, demands that we eliminate all direct subsidies for higher education. The exact same thing that causes PIF to make PAYE students worse off is what causes all direct subsidies for higher education to make PAYE students worse off. This argument should be abandoned. It is really quite bad.