Subsidizing College Education

Gaining a college education seems like the best way to improve human capital and to earn a higher income. More important than one person's benefit, that higher income will mostly increase consumer spending, which can benefit society by stimulating demand. However, some people cannot afford college. A subsidy should provide adequate encouragement.

The Census Bureau states that 33.4% of Americans over 25 have at least a four-year degree, but I will pick the round number of 30%, assuming that some bachelor's degree holders had scholarships or grants or such, which basically function like a subsidy by providing financial aid.

Imagine a graph with total college education subsidy in dollars per student on the x-axis and percent of people who pursue at least a four-year degree on the y-axis. At our current subsidy of $0 (x=0), 30% of America has a college degree. At a very high subsidy, everyone would pursue a bachelor's. If every American restarted life, a function B(x) showing an their chance of pursuing a bachelor's per dollar of subsidy would look like:

B(x)=30%

x->0

and

B(x)=100%

x->infinity

or like this graph (I scaled everything up ten times for easier viewing. 100% is now 10):

Graph 1

*To make B(x)=3 at x=0, I added 3 to my logistic growth function. Then I made the numerator 7 to make 10 the whole function's maximum.

Each person who goes to college may add nearly one million dollars to lifetime earnings. That oft-repeated number has been challenged, but according to 2014 and 2017 data from the BLS, a bachelor's degree holder earns $461 or $471 more than a person who holds only a high school diploma. The college grad earns (on the low end) $24k more per year and $960k more per lifetime (assuming 40 years in the workforce). That one million dollar increase in earnings is mostly accurate. Most of that increase will go into consumer spending at some point, raising aggregate demand.

The government likely wants to gain back their money from subsidizing postsecondary education. Without changing any tax laws, its revenue would increase from income taxes. The $24k increase in salary per year would mostly be taxed in the 22% income tax bracket, which applies to income between $39,476 and $84,200 for the year 2019. The high school diploma holder earns just over $37k, so only 2.5k of the college grad's higher income is taxed at 12%. The graduate may defer tax payments with a retirement plan, with which they will probably pay 12% on distributions during retirement, which will last around 20 years. To simplify all of this, I will estimate on the low end an 18% effective total income tax rate.

The federal government would recoup over $172k over a person's lifetime ($960k x 18%), which could translate to $43k in subsidy for each of college's 4 years. This is true if income taxes are collected over 60 years (40 in the workforce, 20 in retirement: 82 year lifespan). However, even if the the government would like to earn back their subsidies sooner, it can still provide substantial assistance to students (the x-axis is desired years of recoupal, the y-axis is amount of subsidy in thousands per year of 4-year college):

5 years of recoupal pays for books, supplies, personal, and miscellaneous expenses at the University of Michigan according to their estimated Cost of Attendance page. 20 years of recoupal nearly pays for an instate freshman or sophomore's yearly tuition. 40 years can nearly pay for an entire year at UMich.

*This is a low estimate. As you can see in the green line's formula, I took the total increase in earnings (960) and split it over 60 years, meaning that this person deferred and lowered income tax on a third of their income (20 years in retirement). Most Americans do not do this, but I am trying to show the benefits of this subsidy even with grossly underestimated revenue.

I would expect Graph 1 to truly look more like this, where the x-axis is subsidy in thousands per student per year of 4-year college and the y-axis is percent of people who will get a 4-year degree:

I have only a rough idea of how this subsidy could be implemented; I first thought of a federal income tax deduction equivalent to subsidy per student per year of four-year college (not enough), then a deduction from all federal taxes (still not enough). I believe the government may need to offer very obtainable loans and then forgive the debt once the student graduates and provides evidence that they have a bachelor's degree. To maximize its return on investment, the government could choose to only provide this comprehensive forgiveness of debt for STEM majors or other high-earning degrees.

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A single college degree can improve a person's life but more importantly the country as a whole. Admittedly, the subsidy provider may need decades to recoup its investment, but a higher income much more rapidly stimulates the economy. America can come in line with the rest of the West and build for itself a richer and happier future.

Thank you for reading,

George Fane

2014 BLS earnings chart: https://www.bls.gov/careeroutlook/2018/data-on-display/education-pays.htm

2017 BLS earnings chart: https://www.bls.gov/opub/ted/2017/high-school-graduates-who-work-full-time-had-median-weekly-earnings-of-718-in-second-quarter.htm

UMich Cost of Attendance: https://finaid.umich.edu/cost-of-attendance/