Tuesday, April 23, 2019

The Implicit Regressivity of Warren's College Plan

Warren's college plan appeals to many students who view debt as an unwarranted burden - and rightfully so. However, the implicit regressivity of the plan has many unintended consequences. When looking at the housing market, we observe that wealthier landowners often lobby for rent control and zoning restrictions that drive up the cost of housing, lower the supply, and lead to less desirable outcomes for the majority of poor and working-class Americans. In this situation, the landowners are happy and their problem of having 'luxurious’ housing is met, but there are many unintended consequences. You can apply the same logic to Warrens forgiveness plan which may “fix” the acute problem, but leaves a lot of questions still unanswered.

Many students can afford to pay a considerable amount toward their higher education making it wasteful to give them a free ride. Most people in college are upper middle class to upper class so I'm not exactly sure why these people should be getting a subsidy. It's also known that subsidies that induce marginal students to attend college provide negligible benefits since it seems that such students are far more likely to drop out or become underemployed even with a four-year degree, implying minimum wage gains from a massive subsidy funded by taxpayers. Given these facts, it wouldn't be unreasonable to claim that the impact of a free college subsidy is a benefit that is captured by the upper and middle class, who were already receiving significant gains from their degrees and already had the financial means to pay for their degree. All the while, not many of the marginal students that can now attend due to “low tuition” are receiving benefits. The debt forgiveness section would reasonably be targeted if you cut the qualifying household incomes in half.

Probably the most overlooked flaw of that plan is that it's an implicit 33% marginal tax rate over the income range for affected individuals. At an income of $100,000(the phase-out threshold), you can get loan forgiveness of up to $50,000. At $250,000, you would get none. We can assume that this is a single year income and the phaseout occurs linearly(as implied.) If both these are true, then for each extra $3,000 that I earn above $100,000, I would lose $1,000 of debt forgiveness. Thus, a 33% marginal tax rate. Once you combine state and federal taxes, the effective marginal tax rate on income is in the range of 60-85%. Some individuals may take advantage of this by deferring the realization of capital gains, accelerating realizations of losses or by taking unpaid leave, etc, but most will not.

As I said before, I would support lowering the threshold, but I would couple the policy with other projects to make an effective long term solution relating to college costs. The main driver of high college prices has been the increase in college attendance, which is largely due to expanded college access she to loans. We greatly expanded the ability of people to go to college without appreciably increasing the number of institutions relative to the population - we created a demand above and demand overshot supply, and so the price rose. The primary method to combat this would be to expand the number of colleges, so that supply and demand fall back in line. However, this would take a long and since, due to college culture signaling, the demand is so high you would probably need a lot of colleges. To circumvent this problem, it would be efficient to couple the college expansion process with an expanded Income Shared Agreement that decreases the necessity for loans and makes the loan environment less sporadic and more controlled. This would act as a stabilizer for the market. We should also make community college and trade schools free for students who maintain decent grades, to lower the demand for 4-year colleges and incentive alternative routes towards “success”. This would aid in bringing down the supply and demand for a four-year college.

In an expanded ISA framework, an equity financier would agree to pay for your tuition up front for a particular class. In exchange, your promise to pay x% of your income to the financer for your first couple of years in the workforce. There's a case to be made for a cap so let's say around 10 years. Right now, ISA plans are limited so we should work on expanding them. We could increase the interest in income-based repayment plans for government-financed loans until the government expects to breakeven on the loans. Currently, the subsidies the government gives in debt financing makes ISAs uncompetitive. This has the added benefit of increasing the progressivity of education subsidies. Also, fund the IRS and make them handle repayments since they have the existing infrastructure in place(FICA taxes) that private actors do not.

Lastly, the vast majority of states have cut education funding so more of the burden was shifted from the taxpayer to the college student. Basically, on average, 80% of soaring college costs can be attributed to cuts in funding.

“In the median state, South Carolina, the decline in state appropriations explains 81 percent of the increase in tuition revenue. Only three states — Alaska, North Dakota, and Wyoming — have kept funding for higher education on pace with inflation and enrollment growth (represented by negative numbers in the table). In 17 states, the price of college would have actually declined since 2000 (states with a share greater than 100 percent in the table) if funding had been kept constant and the schools applied for that money entirely to students’ tuition bills. While state funding has rebounded somewhat during the economic recovery following the Great Recession, most states’ increases have not kept pace with enrollment growth."


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