The graduates would help the college repay the college’s debt by paying a percentage of their taxable income above a full-time annual minimum wage level income (say $15,000/year) that they might otherwise earn for twelve years after graduating.
This would be very similar to the income-based repayment system used in England and by a few percent of American graduates with low incomes and large amounts of student debt.
The percentage would be the accumulated sum of .5% for each semester started and .5% for each semester in which the student earned credit.
There would be a cap of 6% for bachelor degree candidates and 3% for any other unearned degree candidate.
If an associate degree was earned, then the percentage would rise to 5% (about six month’s worth of income over a 12-year repayment period) and if a first bachelor degree was earned the percentage would be 9% (about a year’s worth of income over a 12-year repayment period).
Another bachelor degree earned after the first or any master degree would add forty-eight percent (about five month’s worth of income) spread over a number of years and the maximum annual repayment percentage of above an annual minimum wage level income would be capped at 12%.
A J.D., M.D.. or D.D.S. degree would add one hundred fifty percent (about seventeen month’s worth of income) spread over a number of years and the maximum annual repayment percentage of above an annual minimum wage level income would be capped at 15%.
This sounds complicated, so I will give an example.
Let’s say I spend a year at Starter Community College. Starter Community College can look forward to twelve years of 1% of the excess of my income above $15,000 after I’m out of school.
Let’s say I transfer to Big State University and get a bachelor degree after four years. Big State University can look forward to twelve years of 8% of the excess of my income above $15,000 after I’m out of school. Big State University wouldn’t get [and couldn’t legally get] the full 9% because Starter Community College already would have a claim to 1% for twelve years. Big State University need not mind because I would bring many transfer credits from Starter Community College and I would take only about three-fourths the usual number of courses from Big State University. About 88% of the money for about 75% of the teaching work would be a great deal for Big State University.
Imagine I then go to Elite Law School for three years and get an J.D. In 2018 I might earn $85,000. That would be $70,000 above an annual minimum wage income of say $15,000. Start Community College would get 1% of that $70,000, or $700/year. Big State University would get 8% of that $70,000, or $5,600/year. Elite Law School would get 6% (15% maximum cap -8% -1%) of that $70,000, or $4,200/year.
In 2029 I might earn $215,000. That is $200,000 above an annual minimum wage income of say $15,000. Start Community College would get 1% of that $200,000, or $2,000/year. Big State University would get 8% of that $200,000, or $16,000/year. Elite Law School would get 6% (15% maximum cap -8% -1%) of that $200,000, or $12,000/year.
In 2030, I might earn $235,000/year. I would be done with twelve years of repayment contributions to Starter Community College and Big State University. Elite Law School would still have a claim to 150% minus 12*6%, or 78% of annual income above a full-time annual minimum wage income payable at a maximum rate of 15% per year which would be 15% of $220,000($235,000-$15,000), or $33,000.
In 2034, I might earn $265,000/year. Elite Law School would still have a claim to 18% of annual income above a full-time annual minimum wage income payable at a maximum rate of 15% per year which would be 15% of $250,000($265,000-$15,000), or $37,500.
In 2035, I might earn $285,000/year. Elite Law School would still have a claim to 3% of annual income above a full-time annual minimum wage income which would be 3% of $270,000($285,000-$15,000), or $8,100. And with that $8,100 repayment, I would be done paying for my upper level schooling.
All these amounts would be adjusted for inflation including salaries (hopefully) and the amount of an annual minimum wage income (by law).
The interest rate the colleges might pay Uncle Sam to borrow might be 3%, which is in-line with normal Keynesian inflation, making the money effectively interest-free.
Students would contract with their college to pay a mutually agreed percentage. The percentages here would be legal maximums and the actual personal percentages would be subject to negotiation.
Students with rich parents would say the $40,000 per year full-rate tuition their parents pay to Ivy Clad University should be enough and would negotiate to not pay any percentage and would have daddy wave $40,000 in cash if need be. Shopping for Junior’s college education would be like shopping for Junior’s BMW or Mercedes.
By lending to colleges, the great risk if faced by an individual is reduced as it is with health insurance by diversification.
By pooling repayments, repayment for college, like paying for medical expenses via health insurance, would not be an insurmountable individual problem if a graduate gets sick or fired or can’t get a job right away.
Colleges would be relying on thousands of their carefully picked and finely educated individuals that they will further improve. While I may have a low income this year, some of my college’s alumni may make hundreds of millions per year each in 2013.
Harvard University might have paid for the education of a thousand students by 9% of the income of just one student it almost tossed out.
As for living expenses, college students have to eat like other high school graduates. In my day it was often spaghetti. I personally ate very well while in college because I negotiated a good deal with the financial aid office using negotiating skills learned from my relatives.
I paid modest amounts of rent similar to what my brother paid to drive a car to avoid having to use three different buses to get to his college from our suburban home.
In Britain, students from low-income households can borrow money from the government for living expenses. What I suggest is that the American versions of living expense loans have an interest rate of 4% annually and be repaid from a zero income base at a 5% of income repayment rate. The student would borrow from the federal government and be liable for repayment for up to 25 years. The interest rate of 4% would compensate the government for inflation averaging 3% and the write-offs after 25 years.
The annual maximum living expense borrowing amount might be six times the lowest HUD fair market rent of a two-bedroom apartment no more than one mile or one bus ride or any subway journey away from the college less 600 times the legal hourly minimum wage where the college is. Students often share apartments or houses to cut costs. A two-bedroom apartment would have twelve months of rent due, with the two students it would hold each paying for six months effectively.
The college financial aid office could figure out the maximum living expense borrowing amount so students wouldn’t have to spend hours researching the bus routes and HUD fair market rents. Students could work at least 700 hours a year in a job or jobs paying at least the minimum wage. That’s 10 hours a week for 40 weeks and 30 hours a week for 10 weeks. The money from 100 hours of work could be used to pay for books.