'Pay It Forward' and Higher Education Subsidies: A Theoretical Model

Abstract

Since 2013, more than 20 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 facets of potential PIF policies – a deferred tuition approach and an income share approach – on college access and on voting equilibria over subsidies 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. We show that the equilibrium level of subsidies to higher education will not necessarily decline under PIF, and may increase in some equilibria due to changes in college access for low income groups. We also present a descriptive cross-country empirical analysis showing that there are higher levels of access to college credentials in countries with deferred tuition systems.

Keywords: Higher education finance; political economy

JEL Classification: I22, I28