Here’s a novel idea for college bound students and their families that looks like it’s about to be tested for real in – of all places – Michigan.
The idea is that students would be able to go to college tuition-free for the duration of their studies. In exchange, the student would pay a portion of their income once employed after college.
For each year of college attended, the student would pay for five years. So, a four year graduate would pay for 20 years. The payment being proposed would be 2% for (less expensive) Community College attendees, 4% for University students. Payments would only kick in when earnings exceed the poverty level.
While some 20 states are discussing the idea, Michigan has proposed a $2 million fund to experiment with the idea with about 200 students. There are some pretty intriguing implications of the proposal.
- The relief it would offer students and their families would be extraordinary.
- The starter housing market – which is languishing because young people – saddled with onerous student debt – cannot qualify for a mortgage. Since payments under the percentage structure would be proportionate to income, more would qualify for a mortgage than do under the current student loan repayment system.
- It would allow for job transitions without imposing financial hardships on young people
- Since the payments are interest free, there would be no long-term interest rate risk for the student.
- Students would be further encouraged to complete their degree work as quickly as possible.
- Since Grad students would pay more – for a longer time – they would more thoroughly consider the ROI of a grad school decision.
- The “system” for awarding “scholarships” could tie academic performance to the repayment obligation.
- The idea of state-run experiments (rather than sweeping – and often failed – federal policies), creates competition, agility, and a motivation to succeed.
On the downside, students who accelerate their earnings significantly could end up paying much more than what their education would have cost under the current system.
But assuming the percentage guideline doesn’t rely on a high earner subsidizing a lower earner, this could be easily remedied with future enhancements such as a buyout clause or another mechanism.
Either way – in a world that both needs and lacks financial creativity – this is a pretty novel approach to a growing problem with economy-wide implications.