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A radical idea for reducing student loan debt

New thinking

By tying the cost of a degree to a student's earning potential after graduating, accounting professor Sajay Samuel argues we can put a big dent in the US's $1.3 trillion college debt load.

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    Sajay Samuel, clinical professor of accounting, Penn State Smeal College of Business.
    Sajay Samuel
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Four years ago, after advising a couple of students on their graduate research focused on rising student debt, Penn State accounting professor Sajay Samuel became hooked on the issue. In February he gave a TEDx talk describing his ideas for reducing the nearly $1.3 trillion combined student debt load in the United States.

Dr. Samuel spoke with The Christian Science Monitor’s Lonnie Shekhtman about his proposal for a new model for college pricing, which he calls “income-based tuition.” It would tie the cost of a degree with a student’s earning potential after school. Their conversation has been edited for clarity and brevity.

Q: You’re a professor who’s been questioning whether what students get out of college is worth the high cost. What if people listen? What about your job security?

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I myself am a beneficiary of American higher education. I came here about 25 years ago from India to pursue doctoral studies. I was able to get through in part because I had an assistantship and I was able to teach on the side and so on. One animating reason [that I’m talking about this] is that I benefited, and now this is becoming locked because of financial reasons from a whole bunch of people.

What is popularly discussed in the media and among politicians is finding ways to tweak the problem at the margin – let’s reduce the interest rate at which student debt is carried, for instance, or let’s extend the time of the loan payment period during which the student can pay the loan, let’s give a forgiveness program. But the real folks who can control the cost, which is the issue at hand, are the university administrators.

Q: Why would they want to?

Short of fixing some external pressure, there are no incentives for university administrators to hold down the cost of tuition. Fair enough. And that is what this proposal is about. If tuition costs are linked up in a public and visible way to earning potential, then the pressure ‘from the market' will feed back into the university and people will feel obliged to deliver the service at a reasonable price. I don’t think it is widely appreciated that everyone pays by and large the same for what is in effect a highly differentiated product. If you look at the market more carefully, I think it’s entirely possible without destroying the university structure to price these things in a way that it would make sense for everyone, who wants to, get a higher education without it being financially ruinous.

Q: How would this work exactly?

Let us assume a drama student graduates and earns about $30,000 a year, and an electrical engineer graduates and earns $70,000 a year. We can presume that the benefits of a college education last for about 20 years [Author's note: That’s how long a college degree is expected to contribute to a higher income. After that the benefits are expected to wear off].

We would argue that a percentage of the benefit from going to college, which is your higher income, let’s say 15 percent of that, could be used from your monthly pay to pay off your debt. This applies equally whether you’re an electrical engineering, or drama student, or philosophy, or whatever you might be doing. And so what you get then is, every student, regardless of major, is able to pay back his or her college degree at 15 percent of income within 20 years. What then should the university be charging as cost? The cost should be 15 percent of expected income for 20 years.

There’s a lot more work to be done on the details – but when you do a first pass at this question, and you see, hey, today the drama student is paying the same as an electrical engineering student but earning much less. Of course the demand is going to be that the drama student pay much less. Wouldn’t that put the university in a bind because it’s losing all this money? But when we put it all together, [we found that] a drama student typically consumes much fewer resources of the university than an electrical engineer or an accounting student. Faculty at a business school and an engineering school typically get paid a lot more. You need labs and mock Walls Street rooms and so on.

So if you do the costing correctly, it is our sense that the university will not lose money if they price degrees correctly. It seems disproportionately the case that some majors are being hurt both by paying too much and earning too little. And those are the ones who are by and large in unpayable debt situations.

Q: So what do those indebted populations look like?

Disproportionately, the ones who went to back to school as adults and got their degrees, or didn’t graduate, from for-profit universities. This whole adventure about for-profit universities has been very, very questionable and counterproductive when it comes to actually giving people the skills and education they need to go and get a job. The second large group of people is the ones coming out of non-technical fields of education, such as pottery and printing and music and so on. And the other indicator is whether you come out of a rich family or not.

Q: Some people say that the wide availability of cheap federal loans is causing college to become more expensive. What do you think?

There is a very plausible case to be made that the very institution of cheap and widely available federal loans for higher education has contributed to the increased cost of it. When you give out a loan for a college degree, you’re presuming that just giving the loan will have no consequence on the cost. But over a period of time, the cost begins to rise. If someone knows you’re going to get a loan to take my service, and there is no restriction on the size of the loan, because the service is thought to be an unqualified good, then I’ll just keep increasing the price of that service.

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