Taxpayers Should Fund Public Universities, Not Private Ones

http://www.motherjones.com/kevin-drum/2012/06/taxpayers-should-fund-public-universities-not-private-ones




In the New York Times today, Luigi Zingales criticizes student loan programs for inflating tuition rates. Basically, he figures that whenever federal aid levels go up, universities raise their tuition rates and suck in all the extra money. Students themselves end up just as deeply in debt as they were before.

I suspect there's something to this for private universities. But I have my doubts about Zingales's favored solution:

'Investors could finance students’ education with equity rather than debt. In exchange for their capital, the investors would receive a fraction of a student’s future income — or, even better, a fraction of the increase in her income that derives from college attendance. (This increase can be easily calculated as the difference between the actual income and the average income of high school graduates in the same area.)

This is not a modern form of indentured servitude, but a voluntary form of taxation, one that would make only the beneficiaries of a college education — not all taxpayers — pay for the costs of it.

The cost of enforcing contracts contingent on future income is very large, but there is an effective solution: piggybacking on the tax collection system. The Internal Revenue Service could perform collection services on behalf of private lenders, and at no cost to taxpayers. (In Australia, such a system has been in place since the 1980s. The national tax agency enforces repayment of loans contingent on income, though the payments of the wealthiest graduates are capped, and therefore less affluent graduates need to be charged more to make the program viable than in the system I am proposing.)'

I wonder how the tax incidence of a program like this would differ from simply raising income tax rates on the wealthy a bit? Probably not that much, really, but you'd still have the problem of restraining tuition increases. As long as the government is making fixed amounts available to students, private universities have an incentive to take that money and then add on every cent the traffic will bear.