PAY AS YOU EARN
In the special issue on education (REASON, April/May 1971) Christopher Jencks raised the question of how most students would ever afford college if the taxpayers did not provide the funds. Many critics charge that, despite free-market rhetoric, lending institutions would just not risk the funds to finance most students' educations: moreover, corporation grants in exchange for work commitments are generally considered unwieldy and inflexible, therefore unlikely. Now, however, a proposal is being tested that points the way toward a radical restructuring of higher education funding which could eliminate the conventional justification for taxpayer support.
The plan is called PAY AS YOU EARN (PAYE) and was first proposed ten years ago by Dr. Milton Friedman. It rests, essentially, on two principles: (1) that the fundamental responsibility for paying for college-level education should rest with the customer (the student) and (2) that education should be priced at a level that fully covers the cost of the service provided ("full-cost pricing"), rather than being subsidized by foundations, research grants, or taxpayers in general. Basically the plan calls for a college or group of colleges to raise tuition to the full-cost level and set up a massive loan plan available to (and needed by) most of the students. The unique feature of the plan is that repayment of the loans would be during a very long time period (30 to 35 years), based on a small fraction (e.g., 0.4%) of the student's annual salary. Thus, those who benefited most monetarily from their education would pay back the most, often more than its original cost, while those who benefited less (monetarily, of course) would pay less.
The potential of higher than usual repayments for long periods of time would attract investors, while the relatively low annual repayment cost would attract students. Such a plan could put to rest the notion that "everybody" should pay for universities because "everybody" benefits. It would make explicit the benefits received and relate payments directly to the most readily available measure of those benefits—the student's income.
After Friedman proposed the concept it lay dormant for a number of years until it was picked up several years ago by Professor Jerrold Zacharias of Massachusetts Institute of Technology and the Ford Foundation. In 1967 a Zacharias-led study panel offered the plan to the Johnson Administration, only to run into extensive flak from state-supported schools, raising the old "everybody-benefits-from-education-so-everybody-should-pay" line. It has only been within the past year, as universities began experiencing their most severe financial crises, that the plan has begun to get a serious hearing. Planners at Harvard, Princeton, Yale, and other prestigious schools began discussing PAYE with the Ford Foundation last fall, and in February Yale became the first school to adopt the plan.
Under Yale's "Tuition Postponement Option" (accompanied by a $350 increase in tuition), students may receive a full loan for their tuition and expenses, with 35 years to repay, at 0.4% of their annual postgraduate income. In March, Duke University became the second U.S. university to adopt PAYE, with a plan based on repayment of 0.3% of students' incomes for 30 years.
The progress of Yale and Duke's experiments with PAYE will be closely watched by other colleges, since a Carnegie Commission study reports that over two-thirds of all colleges are on the brink of financial chaos (Yale's 1970 deficit was $2 million). Vernon Jordan, president of the United Negro College Fund endorses the plan, pointing out that "It's the student who gets the benefit of the education, so the burden should be on him and not on the family who doesn't have the money to begin with." Or, one might add, the taxpayers, who don't either.
PAY AS YOU EARN could well signal the death of tax-financed universities and thereby the beginning of the separation of Education and State that educational reformers Ivan Illich and John Holt have been calling for.
• "School Loan Plan Studied by Foundation," LOS ANGELES TIMES/WASHINGTON POST wire, 10 January 1971.
• "Going to Yale on a 35-Year Loan," BUSINESS WEEK, 13 February 1971, p. 32.
• "Learn Now, Pay Later," TIME, 1 February 1971, p. 57.
• "Duke Defers Tuition," CHEMICAL AND ENGINEERING NEWS, 22 March 1971, p. 45.
For generations the Interstate Commerce Commission has operated as a shield, protecting and preserving economic groups from the discipline of the marketplace…The ICC found itself surrounded by a special interest constituency that viewed the agency as an opportunity for protection from competition and for insulation from consumer demands…Long before it became a pattern of our political economy, the ICC and the transport industries forged a corporate state that utilized public power for private pursuits.
Thus did Ralph Nader characterize the ICC in the introduction to the 1970 "Nader Report" on the infamous agency. Since then it has become increasingly difficult for officials in Washington to defend the ICC and to a lesser extent the CAB and similar regulatory bodies.
Early in 1970 the Council of Economic Advisors took the lead in raising the deregulation trial balloon. In its Annual Economic Report, the CEA stated flatly:
The original justification for regulation—that railroads were monopolistic—has lost much of its validity since there is now considerable competition from other modes of transportation…A policy of permitting and encouraging competition of all kinds would, if general economic experience is any guide, make the industry more efficient as well as benefit the public.
Following CEA's lead, and spurred on by the Office of Management and Budget, the Transportation Department began "cranking CEA reports into [their] thinking." The ultimate goal is to end regulation of all air, land, and water transportation, but the first major step will be limited to land and water—the domain of the ICC. The odds appear good that the ICC will be abolished within the next several years.
Deregulating part of a thoroughly regulated mixed-economy is not particularly easy, although it can be done, as the Canadian example demonstrated (REASON, "Trends," March 1971). U.S. railroads are expected to favor abolition of the ICC because, despite the protection they receive from it, they are harmed more by the protection it gives to trucking and waterway companies. The latter industries are among the most thoroughly protected of all U.S. industries: trucks operating on federally-built superhighways, with strong ICC-imposed barriers to free entry; and barges operating on waterways maintained at taxpayer expense by the Army Corps of Engineers. Both are determined to see the ICC's current rules restricting rail operations continue in force and will fight any moves toward deregulation.
Because of the political realities associated with such interdependencies, deregulation will probably have to be gradual. Rate deregulation would probably come last in a series of steps starting with removal of legally-imposed entry barriers, especially in trucking. A good bet is that such phased deregulation could involve tradeoffs among different modes, removing a restriction on one, while compensating a competing mode by removing a restriction on it. (Given the number of restrictions, the number of such possibilities will be limited only by bureaucratic imagination.) One example, already proposed, would let railroads lower prices to compete with waterway competition, while simultaneously allowing barge operators to mix regulated and non-regulated cargoes in the same shipment.
• "White House Eyes Deregulation Route," BUSINESS WEEK, 21 November 1970.
• "Washington Report," PRODUCT ENGINEERING, 7 December 1970.
This article originally appeared in print under the headline "Trends".