Conservatives have been gushing praise for Milton Friedman on what would have been his 100th birthday last week. For some liberals, though, Friedman is a more controversial figure, especially in education policy – he proposed what we now know as school vouchers. Yet liberals do thank Milton Friedman for one thing: he proposed the idea of an income-contingent student loan program.
Yes, in case you haven’t heard, many sources cite Milton Friedman as the father of income-contingent loans, including a 2010 Inside Higher Ed op-ed. Income-contingent loans vary by program, but all involve the stipulation that a borrower repay at a rate based on a share of his income, and the newest federal programs involve loan forgiveness after twenty years. For years advocates for income-contingent loans have gleefully stated that Friedman proposed such a structure – a 1988 New York Times article notes that Michael Dukakis’s proposed income-contingent loan program was based on one “first proposed by Milton Friedman, guru to a generation of conservative economists.”
But it turns out that Milton Friedman didn’t advocate for income-contingent loans, nor was it the basis of his idea. In fact, Friedman probably would not like the three income-contingent repayment plans now available in the federal student loan program, nor would he sanction some broader version of those plans which tend to please student advocates and progressive pundits.
No, Friedman’s actual proposal was something closer to an equity investment. Think stocks, not loans. Under his plan, the government would provide a student with financial assistance to pay for college, and in return, the student would agree to pay a percentage of his income back to the government each year upon finishing school regardless of the amount of money initially provided to him by the government.
Splitting hairs? On the contrary, the difference is hugely important. Income-contingent loans are fundamentally a privatized-gains-socialized-losses model; an equity investment is a socialized-gains-socialized-losses model.
When the government issues a loan, there is a limit to how much a borrower must repay, no matter how much he earns – and therefore there is a limit to what the government can earn. Once the borrower repays what the government lent him plus interest, he is debt free, even if he enjoys big returns on his educational investment. Those are his to keep after paying his loans. It is privatized gain. But if those gains don’t materialize, he is unable to repay his loan and the loss is socialized.
Under an equity investment arrangement, losses are socialized just like they are under a loan program. But a student who realizes a big return on his education investment shares it with taxpayers by repaying more than he would if he repaid a loan with interest. It is a socialized gain.
American are typically outraged when government programs privatize gains and socialize losses. Yet when it comes to student loans, they give it a pass. Worse yet, the inherent fairness of the equity investment approach to funding higher education seems to rub them the wrong way.
Yale University tried something like an equity finance program in the 1970s and as students began repaying, many complained that some graduates paid a lot more than others. “The only significant way the program seems really to have gone awry is in misjudging the gratitude of those who would benefit from it,” wrote Timothy Noah in response to a Wall Street Journal piece about the program ending. “Twenty to 30 years on, the richer ones are bitching about how much they've had to pay. ‘[E]asily the worst financial decision I ever made,’ gripes David Bettis, a physician in Boise… An e-mail support group for self-made Yalie plutocrats who now regret opting into the repayment scheme was started by Juan Leon, ‘who now sells Gulfstream jets in Latin America.’"
Liberals and progressives found inspiration from Friedman’s idea and now champion income-contingent loans. So why do most stop short of endorsing his actual proposal? Do they think privatized gains and socialized losses are acceptable for student loans, but not other programs? Or do they believe that most people – no matter how progressive – are just like the Yale students who bristled when they were forced to share their gains with the people whose investment help make those gains possible?
Maybe. But it’s probably more than that. Friedman said it was due to “the novelty of the idea, the reluctance to think of investment in human beings as strictly comparable to investment in physical assets” that prevents us from implementing the equity investment structure.
Ironically, Republicans, Democrats, and all who support income-contingent loans speak of higher education as an investment in our nation’s future. But higher education will never truly be a public “investment” until we socialize the gains, and not just the losses. That’s how Friedman would have wanted it.