I keep trying to figure out this whole idea behind paying for college. I seem to be missing something.

Most everyone agrees that higher education is a private good. Most people, although not always the same people, agree that higher education is private good.

The first question is how much of either?

But does level matter? Yep, fewer states directly subsidize graduate and professional programs. Less financial aid is available to those students than a decade ago.

Despite the fact community colleges serve a greater number of students who are less than fully prepared for college, they typically receive a fraction of the support of four-year colleges. Fortunately, there are fewer frills (like full-time faculty) at community colleges, and despite lass financial support, they cost much less to the student. (Yes, the state spends less, but since the colleges are supported to a level that matches the needs of their students, attrition is high and completion is something other than timely, and so I would argue the cost is higher. Too many opportunity costs from subsidizing students with little hope of completing given the circumstances.)

So, if we just look at a traditional four-year student at a public institution, we see something like this:

One year of residential college: $24,000 (after a $7,000 subsidy from the state).

Four years, after increases, call it $100,000 for an on-time completion.

If the student came from a relatively poor family, the federal government might have kicked in as much as $21,000 and change. The state may have added $16-20,000, with another $12,000 from institutional aid (which if it does not come from a large endowment, it probably comes from tuition dollars of other students.) So, let’s call it a four-year net price of $50,000, roughly $12,500/year.)

That is $50,000 for the student and their family to cover. Since we assumed earlier the student got a full Pell grant, we probably should assume her family was unable to contribute anything and that the entire $50,000 is in loans.

So, the student borrows $50,000 for a solid degree in English with a 3.4% interest rate overall (which is probably lower than reality). But, she gets a job right after graduation at the median wage for English majors, about $32,000.

So, let’s make a whole host of assumptions.

She enrolls under Pay As You Earn (PAYE) right away.

PAYE remains unchanged structurally and legally for the next 25 years.

The poverty level for an individual grows about 2% annually over time. (Discretionary income under PAYE is household income – 150% of the poverty level for the household based on size.)

She stays single with no dependents.

She gets a good job at the median wage (in Virginia) for BA English majors at $32,000/year.

She stays at the medium wage which increases at 4% per year  (it was 6% for the median wage of English grads of 1992-93. I can tell you more about that next week.) but I don’t see that growth continuing, but it may.

She makes no payments the first year because her income the year she was in school was less than $20,000. Her payments the first year after are about $98. At the median wage for a in BA English in a single household, she just barely exceeds the first discretionary income cap to require payments.

If all goes well in that she has an unblemished employment history and no health problems, and makes only the minimum required payments, then it looks like she will have made just about $60,000 in total payments over 25 years. The remaining value of the loan will be about $34,000 and will be forgiven.

(This is far too much like General Physics 101 – assume five billiard balls on a frictionless surface with the cue ball traveling ……)

In any event, this looks like a relatively good deal for the student. She gets what is really a very low-cost loan with an effective interest rate for 25 years of three-quarters of a percent, I think.

In the end, the federal government writes off $34k in debt that was spent. (Doesn’t this become a back-end tax on everyone? That money is no longer available for other purposes.)

Meanwhile, we have built and maintained an entire servicing industry to manage this process…or expanded the IRS to handle it as some new legislative proposals suggest. I guess this is job creation and is thus a “good thing,” but I prefer more useful jobs.

Of course, if she had gone into engineering, enrolling in PAYE probably would have been unnecessary, and even if she had, unless she expanded her household significantly right away, she would likely have paid off all her debt well before the end of 25 years.

But I am using the non-gendered median wages. Oops. Women made less in both areas, and the annual growth rates for women were a bit less. But that’s based on graduates of 20 years ago, all that pay inequity stuff is resolved now, right?

Another oops…speaking of 20, PAYE actually has forgiveness after 20 years, not 25. IBR has forgiveness of the unpaid balance after 25 years.  So, really, she gets an even better by deal paying only $39,000 with forgiveness of $46,000.

I guess this why the GAO is planning a study on all this. It seems a pretty crazy way to run a railroad. It just seems to me it would be more cost-effective and less confusing to pay for everything upfront. In the end, there There Just Ain’t No Such Thing As A Free Lunch – we are going to pay the cost one way or another.

Students and families can only be expected to pay so much, no matter how of a private benefit higher education is. Other than the fact that 18-24 year-olds have no money, I don’t understand why families are expected to pay the college expenses of adult children. We don’t require that anywhere else. Unfortunately, we have always done it that way and we have created a marketplace where the targeted consumer is uniquely unable to afford the marketed service.

It also seems to me that this is a system designed to hide the true cost of higher education. Except that is cobbled together more than designed.

The example I used, approximates maybe 8% of borrowers in Virginia in terms of a debt being around $50k without getting into the extremes. It also represents the lower-income category net price of one of our small public colleges. However, as I have written before, if current trends continue, the class of students entering now may well have an average debt of $42-47K for those borrowers that graduate. That makes this discussion more applicable.

What am I missing? What have I got wrong? It looks to me like the states are ducking their responsibilities and spreading the cost around through federal tax base….which means we all pay in the end, what we would have paid in the first place, and probably quite a bit more. I think a more rational approach is probably in our best interests.

But that requires rationality, difficult conversations, making commitments, and living to those commitments.