The 5 Percent Solution to Paying for College

Posted by: Dan Beucke on January 12, 2012 at 7:00 AM

wealth_blog_uc_600.jpg

There’s an interesting post and comment stream over at Lou Lavelle’s B-schools blog, about an alternative plan for funding a college education in California. The Fix UC proposal would let University of California students pay nothing to attend if they commit to paying a flat 5 percent of their annual salary for 20 years after graduation. There would be adjustments — you’d pay a smaller percentage if you worked in the public sector — but the more marketable your degree, the more you’d pay for it. And you only pay if you’re actually working. (As one commenter notes, this is similar to a system Australia has been using for years.)

On first glance, this looks like a deal for students. Student fees at UC San Diego for a California resident are $13,234 this year. Total for four years: $52,936. Twenty years of Fix UC payments at 5 percent of salary amount to one year’s average salary. A recent survey of Georgetown University graduates puts the average salary for a 22-to-26 year old engineering student at $55,000; for an arts major, it’s $30,000. The yearly payment gets bumped up, temporarily, if you use on-campus housing. Still, you’re spreading your payments over 20 years, and not paying additional interest as you would with a student loan.

For the universities, the outcome is less clear. The proposal refers to a “compounding” effect. But money that is now paid upfront would instead be paid over many years to come. To borrow that $52,936 and repay it over 20 years would cost $98,814, at the rate of just 3.17 percent that California paid on bonds sold last year. Maybe if graduates’ salaries rise with inflation, they come closer to paying that back. Except that college costs have been rising faster than inflation. It seems hard to make those numbers work.

Of course, you know some Wall Street number cruncher is already working on the tradeable financial product that monetizes the uncertain graduate income stream — and the varying “tranches” of finance, science, and arts majors.

(Photographer: Chip Chipman/Bloomberg)

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"The Wealth Debate" is a running discussion of wealth, poverty, the economy and income inequality in the U.S. and the world. It was started shortly after the Occupy Wall Street movement sparked a global protest about the fallout from the financial crisis and money in politics. You can reach the editors, Dan Beucke and Mark Gimein, by email, or follow BloombergNow on Twitter to keep up with posts.

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