Academic journal article Contemporary Economic Policy

"Pay It Forward" and Higher Education Subsidies: A Median Voter Model

Academic journal article Contemporary Economic Policy

"Pay It Forward" and Higher Education Subsidies: A Median Voter Model

Article excerpt

Since 2012, at least 24 states have considered legislation on Pay It Forward (PIF) models of higher education finance (which enable students to pay the price of college upon departure from an institution, as opposed to paying upfront tuition). This paper-proposes a theoretical model of PIF policies within a framework in which voters belonging to different income groups vote over the level of subsidies to higher education. We analyze the impact of two types of potential PIF policies--a deferred tuition approach and an income share approach--on college access and on voting equilibria over subsidy levels. The results show that college access is enhanced by PIF policies. The equilibrium level of subsidies depends crucially on the pattern of income distribution, in particular on the relationship between mean income and the income of the median income group, and on whether higher education widens or narrows the distribution of income. We show that the equilibrium level of subsidies to higher education will not necessarily decline under PIF, and may increase in some circumstances due to changes in college access for low-income groups. (JEL 122,123)

I. INTRODUCTION

Affordability is one of the most important issues in U.S. higher education today. New models of funding higher education are currently being considered in debates throughout the United States. In particular, at least 24 states have considered legislation on "Pay It Forward" (PIF) models of higher education finance (Illinois Student Assistance Commission [ISAC] 2014). While details differ, the rapid proliferation of PIF program proposals shows a willingness to move from the current system of upfront payment to an income-based system of payment after leaving college.

Because there is no consensus on what exactly a PIF program would entail, PIF is a difficult topic for academic study. In addition, because no PIF plans currently exist in the United States, there are no data with which to test the impact of these programs. Because of the ill-defined nature of PIF and important data limitations, this work contributes to the academic literature and the current policy debate by providing a theoretical model of a PIF policy. This theoretical model makes two main contributions to both the consideration of PIF programs and the broader academic literature. First, this work specifies the underlying assumptions about which generation is expected to pay for college (parents or students) under both upfront and delayed tuition policies. Second, this work builds upon prior theoretical models of higher education subsidies to provide two models of (1) a deferred tuition plan and (2) an income--share plan.

Our theoretical results show that college access is generally enhanced by PIF policies, especially under the deferred tuition approach. The model also addresses one of the central critiques of PIF proposals, namely that they would cause current levels of subsidies to higher education to be eroded (e.g., Harnisch 2014). The model shows that the equilibrium level of subsidies under PIF systems depends crucially on the pattern of income distribution, in particular on the relationship between mean income and the income of the median income group, and on whether higher education widens or narrows the distribution of income. We show that the equilibrium level of subsidies to higher education will not necessarily decline under PIF, and may increase in some circumstances due to changes in college access for low-income groups. For instance, in the absence of PIF there is an "ends-against-the-middle" voting equilibrium in which both voters with high incomes and those with low incomes (who do not attend college) support low subsidy levels. The expansion of college access under PIF to the low-income group eliminates this equilibrium under the deferred tuition variant of PIF. Under the income share variant of PIF, the relative distribution of incomes before and after college determines whether a particular income group prefers to vote for a high upfront subsidy (which is more attractive to those with relatively lower precollege incomes). …

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