Hillary Clinton has proposed to change the way Americans pay for college. The money collected by universities will stay the same, the teaching methods will be unaltered, and students will do the same things for the same amount of time. The big difference is that about $350 billion in additional taxes will be paid by Americans and then the government will make sure that (at least most of) the money gets to the colleges. Paying taxes instead of tuition will make college more “affordable” for Americans, according to Clinton and most of the media (e.g., nytimes), just as Obamacare made health care more “affordable” despite the overall cost remaining roughly constant as a percentage of GDP.
It occurred to me that a politician could promise to raise the average American’s tax bill by $70,000 and then buy each family a Mercedes or BMW at list price. This would be called “The Mercedes and BMW affordability plan.”
One of the interesting provisions of the bill is that, if not paid back via a modest percentage of “income,” loans will be entirely forgiven after 20 years (or 10 years, if working in an official do-gooder job). Consider a Massachusetts citizen who goes through 10 years of college and grad school or professional school, learning a lot of interesting but not very practical material. Towards the end of grad school, the citizen has casual encounters with two different members of the opposite sex earning $250,000 each, and retains custody of the two resulting children. Under the Massachusetts child support system, this will lead to a comfortable $80,000 per year in tax-free payments, none of which count as “income,” plus additional court-ordered amounts to pay for direct expenses of the child, such as daycare while in grad school or college tuition if it isn’t entirely free by then. The payments end when the youngest child turns 23, at which point all of the student loan debt has been forgiven.
What can the well-educated child support profiteer do during those 10 or 20 years post-graduation to maintain skills and also accumulate savings for retirement? How about… work? To get the 10-year “do-gooder” schedule of forgiveness, the citizen starts a non-profit corporation and accumulates tax-free profits inside the corp. (see this article for some numbers on Planned Parenthood, which is apparently able to bank over $100 million per year in profits) Perhaps the citizen pays himself or herself a minimum wage for 10-15 hours per week. After the loans have been forgiven, the citizen can then use the accumulated profit (“surplus” in non-profit argot) to contribute to a tax-deferred retirement account and/or to pay a much higher salary.
What if the citizen doesn’t have any non-profit ideas? The citizen forms a C corporation and works through the C corp., which pays corporate taxes on any profits but retains or reinvests nearly all after-tax earnings. This may not be tax-efficient because if the money is eventually taken out as salary the citizen will also have to pay individual income tax on previous years’ income (this pain could be reduced by moving to Puerto Rico (Forbes)). But, on the other hand, skipping out on hundreds of thousands of dollars in student loan debt should provide a boost to overall financial health. Essentially the citizen meets day-to-day personal expenses from child support and saves for retirement by building up value in the C corporation.
A separate question is how this would work for an American who graduates from college and emigrates to, e.g., Singapore. If he or she renounces U.S. citizenship how does the U.S. then get income data sufficient to calculate the former citizen’s student loan repayment liability?
Readers: What other interesting strategies and outcomes would you expect based on the percentage of income cap and the forgiveness-after-20-years policy?
Related:
- Book Review: The Redistribution Recession (economist looks at the effects on working hours caused by home mortgage loan forgiveness)
- economic research on the return on investment from college
Can’t the citizen also be employed at Netflix during (mostly) the same time?
“Consider a Massachusetts citizen who…”
Ahhh.. I should’ve seen this part coming from a mile away.
Anyways, is there a particular reason or law that forbids loans from being given out based on how employable the major is? It’s crazy that someone can pursue a worthless major from a private school and yet have the ability to borrow 5-10x as much as an engineering student attending a public school.
Granted, it’s unfair that the public school student is getting an undeserved benefit from taxpayers, but that shouldn’t matter to the people giving out loans.
As somebody shopping for cars and considering splurging on a BMW, I initially thought “I’d be totally in favor of the ‘BMW and Mercedes Affordability Plan'”, but then I remembered that a big selling point of those cars is that they are better than Hondas and Mazdas and Fords. If everybody has a BMW or Merc, they cease being special (I guess the truly rich would have to move on to Maybachs).
Similarly, I really think that in the past, the primary value of the college degree was that it signaled to potential employers that the degree holder had some combination of determination and/or good breeding that set them apart from others. This is becoming increasingly devalued.
To quote W.S. Gilbert from “The Gondoliers”…”when everybody’s somebody, then no-one’s anybody!”
On a side note, what percentage of women do you believe sit down in their twenties and think “I know how I will make a living…I’ll have one-night stands with a couple of anesthesiologists and then raise two kids as a single mom”? I agree that the child support system is flawed and needs to be reformed, but your rhetoric could be interpreted as assuming all or most women would want to choose such a path in life, which I find hard to believe.
Mark: You ask ” is there a particular reason or law that forbids loans from being given out based on how employable the major is?” That’s how they do things in Chile, as noted in https://philip.greenspun.com/blog/2015/01/05/two-big-questions-for-economists-today/ .
Alex: You ask “what percentage of women” would seek to profit from ownership of children. In fact the original posting does not specify the sex of the child support profiteer (so you’re betraying your own bias!). It is easier as a practical matter for a woman to make money from children, but there are states in which it could work for men as well. And there are no restrictions on an American moving or traveling from one state to another in order to take advantage of favorable statutes and court customs. How prevalent is earning a profit from one’s children? http://www.realworlddivorce.com/Summary says that as many as 4 million Americans may be doing this. As noted in http://www.realworlddivorce.com/Introduction , however, few Americans are aware of the profit potential in child support. Even in the most lucrative states, such as Massachusetts, citizens interviewed wrongly believed that child support profits were somehow limited. And there are presumably even more people who live in states where child support guidelines are modest who don’t realize how much they could make by having sex in a state where child support is unlimited.
[Separately, you say “I agree that the child support system is flawed and needs to be reformed”. We don’t take the position that college and work should be more lucrative than properly planned use of the child support system. Nor do we take the position that child support systems should be changed. Our goal is to inform readers so that they can use the family law system as designed.]
There are much simpler alternatives not subject to the risk of future changes to legislation. Young Americans qualify for a free university education in Germany, and often in France as well. The education in question, while sadly lacking in crucial disciplines like post-structuralist radical feminist theory, seems good enough for the world’s third largest exporter.
Bring on the free Benz. Congress would not really raise taxes enough to pay for it, they would borrow the difference at a much better interest rate than I could get. What could go wrong?
If the taxes are collected in a highly progressive manner then the proposal would make college more affordable for most Americans. The cost represents represents a fairly small fraction (20%?) of the increase to the 1%’s annual income since 1980. They were doing ok in 1980 and even with the increased taxes would still be doing even better now. I’m not convinced that investing in widespread college education is quite the same as buying everyone a Bimmer.
This plan would make even more money available to the universities. Which will eventually find its way into the pockets of their football/basketball coaches.
[These two individuals are typically the highest paid employees in each state; often making 2-10x what the governor does.]
@ J. Peterson: These two individuals are typically the highest paid employees in each state; often making 2-10x what the governor does.
And once these two state employees vest in the state worker pension plan, they will become the state plan’s highest paid pensioners.
Hillary Clinton will be the Cristina Fernandez de Kirchner of the USA.
In Argentina, Cristina has spent plenty of other people’s money on “para todos” programs. There is even a “futbol para todos” now, so that everyone can watch futbol on TV for free. Viewers are bombarded with pro-president advertisements throughout the match.
College para todos! If Hillary were in Argentina she’s be a Peronist!
A lender’s main job is to evaluate risk, then bill it accordingly. the 10-years or 20-years limitation is just another risk, to which lenders will react by either raising interests or decreasing the amounts they’re willing to lend.
Today, too much money goes into universities, because as it’s almost impossible to default on student loans, it’s an artificially safe bet for lenders. That’s why so much of it goes to lavish campuses, sports teams, non-teaching staff etc.
Young adults are even worse than average consumers at borrowing and spending money wisely, especially on something as long-term as education + decades of student loans. That’s why they’ll spend six figures on a MA in Gender Studies. It seems reasonable to me to protect them from stupid decisions, just as I’m glad that one can’t sell oneself into slavery.
If you give people the means to hang themselves, bankers and marketing wizards will find a way to force them to do so. Clinton considers removing those means not from students, but from lenders.