What if College is Free? #illumedati


Hey everyone, it’s Finance Fridays again. Today we’re going to ponder the question “What if College is Free?”

What if College is Free?

Well, since I talk a lot about 529s and saving money for college, I thought it was appropriate to talk about “What if College is Free?” As some of you may know, college is free in certain countries.

However, as we’ve talked about before:

There is no free lunch.

Their “free college” is being subsidized by their taxes in some way. Let’s take the top example of Norway. I couldn’t find a good recent comparison, but here is an article from 2011:

Comparing Tax Rates in the U.S. and Norway

In this particular example, the difference between Norway and United States (Massachusetts) was $236,000 and $177,000 for effective tax rates of 43.9% and 33% respectively. I didn’t include Florida in this comparison because there is no state tax, which is a less common occurrence.

It’s a pretty significant difference in effective tax rate, and when you consider that their base tax rate is 28%, that’s already pretty high. For comparison, the United States progressive tax rate of 28% only begins at $91,900. However, this is somewhat expected for The Nordic Model, which is kind of “Socialism Mach 6 / Capitalist Mach 2” or some call it “compassionate capitalism”. They have committed to the idea of high taxes in order to provide services, with free college being one of those services.

If you want more recent tax statistics on Norway, you can find them here.

So, let’s get back to Free College in America…

Well, first things first. Which colleges are free? How much of college is free?

If you ask the Democrats during the debate, they all have different plans of varying degrees. I think the most aggressive stance is Bernie Sanders:

Student Debt:
Cancel current student loan debt
Heavily reduce future student loan interest rates

College Affordability:
Tuition-free public colleges, universities and trade schools
Fully fund HBCUs

The least aggressive plan is probably Cory Booker:

Student Debt:
Reform and simplify how students apply for federal financial aid

College Affordability:
Make community college and vocational training tuition-free
Establish path to debt-free college
Invest in HBCUs

Then the other candidates are somewhere in between.

So then let’s look at things and their likelihood (in my opinion).

Student Debt

Canceling all current student loan debt, I think this is very unlikely to happen. Also, is this only federal loans, or does this also include private student loans. Do the people who had federal loans then refinanced to lower private rates lose out on this? There are many problems I see for this to ever happen, even if we exclude the huge debt burden it places on the United States in general. Trust me when I say I would like for it to happen as I still have a ton of loans… I just don’t think it’s possible.

Reduction of student loan rates is definitely something that is possible. However, the more important question is to what degree? Are we saying student loan rates will drop to like 5%? or like 2%? or maybe even 1%?These numbers are very significant and the devil is in the details.

A blanket reduction or “ceiling” on interest rates to 5% probably won’t change much for people. However, a straight up cap on interest rates to 2% (or 1%!) is a huge change.

College Affordability

If all the public colleges and universities become tuition free, then this will make every public school exponentially more competitive than most private schools. Something similar has likely already occurred with NYU Medical School offering free tuition. I’ve actually talked about this before. However, all public schools will not be enough to educate everyone. So you then have this two-tiered system of people who received free tuition from public schools and those who had to take out loans for private school.

This probably won’t affect places like Harvard and Stanford, where people who get in are either given financial aid or are able to pay. However, for smaller private colleges they will likely have problems and need to decrease their tuition. Some may say “good, they need to decrease tuition”. However, if these schools can’t get enough money to keep the lights on, they will end up closing too. Unless, that was the plan in the first place — to force smaller private schools to close. Food for thought.

So what should I do?

In my opinion?

Nothing.

People may think I am a pessimist, but I don’t see any huge sweeping changes happening to student loan debt and college affordability. My guess as to what the compromise will be would be something along the lines of capping student loan debt interest rates on all current and future loans. Then there will likely be some expansion of Pell Grants to help lower income families pay for college. I just don’t see making college free or canceling out all student loan debt going through.

In other words, out of everyone in the recent Democratic Debate, I think the one who has the most plausible plan is probably Joe Biden’s.

Student Debt:
Lower the monthly payment amount for those with income-driven repayment plans

College Affordability:
Two years of free community college
Invest in vocational training and partnerships between high schools, community colleges and employers.
Allow students to earn an industry credential upon high school graduation
Allow Pell Grants to be used for dual enrollment programs, allowing students to earn college credits or a credential before graduating high school

Kamala Harris’s plan is probably also plausible, but not as probable:

Student Debt:
Allow current debt holders to refinance high-interest loans to lower rates
Expand Income-Based Repayment

College Affordability:
Make community college free
Make four-year public college debt-free

I draw your attention to the last line. “Make four-year public college debt-free”. I would be interested to hear her expand on this. Would it be something like after looking at the finances of your family and you a certain amount would need to be paid. Then, after the 4 years that any residual debt would be forgiven on graduation? It’s an interesting concept, but once again the devil is in the details.

Bottom Line:

No matter what happens in the future, I still believe having a 529 will have value. Even in the scenario that public college becomes free and your child goes to public school, that is only tuition. Your 529 dollars can still be used for housing, books, and other things related to school. If you’re lucky, you’ll have enough left over it they decide to continue on to Graduate School or Professional School if they go that path. Otherwise, they can take their remaining 529 dollars and gift it their families.

No matter what the future holds, I believe the 529 will still be valuable.

TL;DR

Just talking about free college.

No politics here, just discussion on what I think is plausible or not.

No matter what the future holds, I believe the 529 will still be valuable.

Finance Fridays Sensei

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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