Wednesday, July 10, 2013

Free** Tuition #hashtag

I heard about this story on NPR on my drive home tonight. In Oregon, they are considering making college tuition free*. Students would pay nothing* for tuition. Free* college? Awesome.

(brief) Pay it Forward Article

You may have noticed the asterisk. What is the catch? In exchange for not having to pay tuition to earn a bachelor's degree, students would have to give 3% of their earnings for 20-25 years of their life. Also, only tuition and fees would be covered. If you need a place to sleep or food to eat, that still has to come out of your own pocket (or your parents' pockets or from student loans). Money for laptops, books and beverages* also has to come out of students' pockets.

We'll consider the average college student. He earns $45,000 a year upon graduation. He gets an annual 3% raise (mostly due to inflation, but a little bit of it has to do with seniority/increases in productivity). In one case, he follows the Oregon plan and has no student loan debt (he/parents covered living expenses with cash on hand and a part-time job working at Jimmy Johns). In scenario 2 he graduates with $28,000 in student loan debt carrying an interest rate of 6.8%. In which case is he better off?
The total for the Oregon plan for 25 years is $50,696.61. If he went the traditional way and paid off student loans over a 20-year period it would cost $51,537.60.

(This is the back of the envelope calculation. In real life students under the Oregon plan would likely still accrue some debt. On the other hand, the average student loan debt for students today likely includes costs beyond tuition).

On a related note, the Federal Government will make approximately $50 billion on student loans this year The government borrows via T-bonds (10-year) with a 2.59% interest rate, and then loans out money at a higher interest rate of 3.4% to 6.8%.

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