(This is part four of a five-part series on how we pay for college. Read parts one, two, and three.) Loans are not the best way to fund higher education, even if we implement an income-based repayment program to ameliorate some of the risk. (If you’re just joining us now, see the previous parts of this series for more than you ever wanted to know about that). What are our remaining options to pay for college? Recently, an idea has emerged with support from a motley crew of strange bedfellows on Left and Right: funding college through a tax on all college graduates. While it might sound like Grover Norquist’s worst nightmare, it’s actually an important way of addressing some of the major shortcomings of our current ‘finger-in-the-dyke’ method of paying for college. For starters, one positive endorsement of this idea is that it has been around for a long time (remember: genuinely new ideas are probably bad ideas). In 1968, Howard Glennerster, Stephen Merrett, and Gail Wilson wrote a creatively titled paper called “A Graduate Tax,” which outlined, in rough terms and old typeface, the basic arguments in favor of this financing arrangement. Under a graduate tax-funded system of higher education, students would pay nothing to attend college upfront. Instead, once they graduate and move out of their parents’ basements, they would begin to pay an additional income tax (say, for example, three percent) on their earnings that would fund higher education. In other words, the current crop of college graduates funds the current crop of college students, and so on down the line. There is no debt taken on by students, which minimizes risk (good); repayment is tied to income, because only people who make income pay the tax (also good); and it is simpler and more easily administrable than plans to make loans easier to pay off (still good). Thus, a graduate tax is better than income-based repayment of loans, which is better than mortgage-style loans, which is better than forcing people to battle each other to the death, Hunger Games-style, to get into college. Yet a graduate tax is still a worse alternative to free public higher education, despite the recent uptick in interest in a graduate tax or similar type of program. Almost There, But Not Quite: A Graduate Tax The main argument for a graduate tax comes from its progressivity. Supporters of a graduate tax point out that most college graduates, particularly those from elite universities that use a greater share of resources, are richer than people who have not graduated from college. Thus, using collective state tax dollars to fund college redistributes money upward toward the rich. Brad Delong, a Berkeley economist who worked under Bill Clinton, wrote recently in favor of a graduate tax. “Given that the average taxpayer of California is considerably poorer than the average Berkeley graduate, that upward transfer to the relatively rich leaves a really really bad taste in the mouth,” he explained. Delong, who is left of center, is not alone in this view. The founder of neoclassical economics, Milton Friedman, felt similarly. Friedman wrote in 1975, “I believe one of the great scandals in the United States is government subsidization of higher schooling. There is no other policy I know of which so clearly and on so large a scale imposes costs on low-income people to provide subsidies to high-income people.” A tax only on graduates would ensure that the uneducated would not be subsidizing the well-to-do. Unfortunately, there are a few problems with the argument for a graduate tax. First, it’s not so simple a question of progressive vs. regressive. What is true is that students at the most elite universities are overwhelmingly wealthy. It is also true that at elite nonprofit schools (Ivy League, etc.) this is even more the case. At these schools, the poor are underrepresented. Students from families making less than $30,000 per year (this is for “dependent” students, rather than “independent” students) make up 18 percent of undergraduate students at four-year schools that offer PhD programs and have large-scale research institutions. But while it is true that the lowest-income students are underrepresented, the distribution of students is still predominantly middle-class. Another 21 percent of students are lower-middle class (from families above $30,000 but below family median income for the country as a whole) and more than 26 percent are upper-middle income (above the median but less than $106,000). We can argue about where the proper cutoff for middle class is until the cows come home and take our jobs, but nearly 40 percent of students at four-year large research institutions – which, with enormous caveats, is a rough proxy for decent school – come from families below the median household income. Middle-class students have borne the brunt of the problems from the rise of loans to finance increasingly expensive higher education. When we also look at two-year colleges (where a majority of all college students are enrolled) and a broader set of four-year schools, the share of lower-income and middle-income students is larger. Taken together, the argument that poor students are underrepresented at the most prestigious schools is not necessarily an argument for limiting public funding of college in general. It is instead an argument for recalibrating the distribution of resources within the college system toward public universities that serve a broad population of students – especially community colleges. In fact, we are currently doing the opposite: as a recent report from The Century Foundation showed, public funding at community colleges and Master’s level schools (which includes schools like the Cal State (CSU) system) to be about half of that of public research level schools (which includes schools like the University of California (UC) system). Since 1982, community colleges have also been educating a vastly greater share of students from poor and middle class backgrounds. This is not to say that budgets at flagships should be slashed; however, it is important to think about the broad differences within what we term “college” when thinking about how best to fund a system. Second, to propose a system for funding higher education based on the fact that at many top-tier schools the poor are heavily underrepresented requires understanding why this poor distribution exists. For one thing, there are many non-college factors that play into the underrepresentation of poorer students at upper-tier schools. Poverty and inequality of previous schooling opportunities are both extremely important, and we should work to fix them. Labor market policies that ensure full-time workers are able to achieve a decent standard of living regardless of the status of their alma mater would help too. At the same time, however, that’s only part of the story. Josh Freedman (me!) writes, “the way our higher education system is designed endogenously affects the distribution of students, rather than simply being a function of a bunch of exogenous ‘other’ factors.” One of the major reasons for the wealth skew is that the current funding system of loans and tuition-driven budgets encourages an unfair distribution of students. To argue the funding of college should be based upon the fact that under the current funding system the poor are excluded is circular. The current system of funding higher education only functions so long as the number of poor students is small. This needs to be approached from both the institutional and student perspectives. For four-year institutions, which derive a large portion of their revenue from tuition and perpetually desire more revenue to fulfill their aims, bringing in wealthier students is the best single action they can take to improve their budgets. Public schools are looking to bring in out-of-state students, who pay higher tuition. The practice of de facto rejecting students by giving them inadequate financial aid offers is widely known; other schools, like George Washington University this year, have admitted to simply rejecting low-income students for budgetary reasons. The pressures on students produce the same results. As discussed previously, the use of loans – which puts risk on the individual – deters low-income students from applying. So too does the idea of college being expensive. Even though the net price of college is often far less than the listed sticker price of schools due to institutional grants and aid money, as long as students believe college is expensive, it will be a deterrent to access. Trust me: a large majority of people think college is expensive. Or trust the data; it says the same thing. Finally, the complexity of the current system is also a deterrent. Financial aid forms are like trying to solve a rebus puzzle from hell, and studies have shown that students are deterred from applying for financial aid due to the forms. Under a system of income-based repayment of loans, the complexity is even worse. Ironically, a graduate tax would go a long way to solving the circularity problem. It eliminates financial aid or repayment complexity as well as the collective notion that tuition is prohibitively high. A graduate tax can also help control rapidly increasing college spending because the funding source is more direct. Relative to free higher education, a specific tax will disincentive some attendance. Overall, though, a graduate tax will help alleviate the distributive issues caused by higher education funding itself. Yet it is not sensible to implement a policy based on a fact that will no longer necessarily be true once the policy is in place if there is a better alternative. As a very insightful but kind of weird-looking analyst explains, “If we accept the logic as long as college is treated as a good for the rich that allows a couple of poor students to come along for the ride, of course it will always be skewed upward.” Third, a graduate tax only for public school students would create a bevy of problems. If a graduate tax only applies to students at public universities, then students who attend private universities will not contribute to funding higher education. Private not-for-profit schools have a bigger divide between rich and poor than public schools do; from my private high school, for example, nearly every person matriculated to a private university. To not have graduates of private universities paying to fund public education is both bad policy and extremely regressive. When a student attends a private high school, his or her family continues to pay taxes to fund public education. K-12 education is a public good that everyone in the community helps support, regardless of whether a child is currently a student there. The same logic ought to apply to public higher education. If private college graduates no longer have to help support public higher education, the idea of college as a communal good ceases to exist. The rich are no longer supporting their communities; each person is on his or her own. The difference between public and private institutions becomes one solely of rich and poor; students who are rich and prefer to pay up front will attend private schools, while students who are poor will go to the public institutions with no guarantee of sufficient access or funding. This segregation problem is apparent in our K-12 system funded primarily by local property taxes: in some areas of the country, wealthy families pull their children out of public schools, leaving behind an unequal public education system. In Mississippi, for example, 71% of public school students are low-income. Mike Konczal explains: “If part of the goal of higher education is to collapse the difference between elite education and mass education, immediately collapsing the types of people who would be interested in attending […] is a major problem.” This problem will grow even larger if students attending private colleges do not have to pay any taxes to help cover public higher education. Under a graduate tax, the moral principle is clear: those who benefit most from a college education ought to pay to support college education more broadly. Yet under a graduate tax that only applies to public schools, this principle is not borne out in full. Graduates of both public and private schools reap the benefits of education, yet only public school students are responsible for helping to support a broadly accessible higher education system. Because students attending private colleges come from higher income families than students attending public schools, this aspect of a graduate tax is itself regressive. If a graduate tax applied to everyone, not just public students, this problem would be solved. But at that point, a graduate tax would be essentially a program of free higher education for everyone. The only differences are that the tax (and risk) pool from which to draw resources is smaller (because rich non-graduates would not pay) and higher education is considered an individual good, rather than a communal one. Finally (yes, finally), the progressivity of a system is dependent upon the tax base. As Peter Lindert described it in a 2012 paper, there are two sides of every policy coin: taxes and benefits. If taxes are progressive and benefits flat, the system is progressive; if taxes are flat and benefits progressive, the system is also progressive. Currently, most colleges and universities are funded by state and local taxes as well as tuition and private donations. State and local taxes, which rely more on flat or regressive taxes like sales and property taxes, are less progressive than federal income taxes. A system of graduate taxes is only more progressive if state and local taxes continue to be the main funding source for higher education. If, instead, more progressive taxes are used to fund the program, the graduate tax is no longer necessarily the most progressive option. The state of Oregon made headlines late last year for an innovative proposal called “Pay It Forward” to fund higher education without having students take on any debt. Pay It Forward amounts to a graduate tax: All of the graduates of public colleges in Oregon would pay nothing up front in tuition but would pay back a percentage of their income for a set number of years. As with other graduate tax proposals, Pay It Forward is an improvement over student loans. It stops putting up-front risk on an individual college student and tries to refocus the debate on better options to pay for higher education. John Burbank of the Economic Opportunity Institute, who helped create Pay It Forward, compares the Oregon program to Social Security for education. In a way, it is like Social Security: the current generation of graduates helps pay for the next generation of graduates. But unlike Social Security, which covers nearly the entire working and elderly population, Pay It Forward only applies to a small chunk of the population. Social Security’s popularity and success have come from its widespread nature: having the entire population in the program spreads risk as widely as possible while also maintaining a broad base of political support. Pay It Forward does not come close to matching these attributes. In other words, a graduate tax is a good alternative to the current hodgepodge that we call higher education finance. But in the areas where it falls short – not making the rich pay, a medium-sized risk pool, and maintaining the concept of college as an individual good – there is still room for improvement.