Harvard's New Tuition-Waiver Plan

Phillip Carter of Slate's Convictions has asked about Harvard's new tuition-waiver program, which he thinks will encourage students to take public service jobs.  Maybe, but I'm not so sure.

Suppose that the third year of Harvard Law School costs $40,000.  Under plan (1), you borrow $40,000 from a bank and give the money to Harvard in return for your education; you owe $40,000 but Harvard pays it, so that you pay $0 back per month as long as you are employed in a sufficiently low-paying public service job.  If you stay in that job long enough, you pay back $0 and the debt is retired.  Under plan (2), you don't borrow anything and don't pay Harvard anything, nor do you have a debt.  But you have a contractual obligation to pay Harvard $40,000 (actually more) if you never take the public service job, and the amount you are required to pay if you breach your pledge gradually declines to $0 as you stay longer in the job.  In short, under plan (1) and plan (2) you pay nothing for your third year at Harvard if you take a public service job for a sufficiently long period time, and you pay something up to $40,000 if you do not.  Incidentally, because the two plans are identical (except for their names and for trivial details, and for the fact that the loan-forgiveness plan may cover more than one year of tuition), the new plan will not have any special incentive effects, for women or anyone else, that the old plan lacked.

To be sure, the new plan seems to have fewer restrictions than the loan-forgiveness plan.  It appears to offer tuition forgiveness to more highly paid people.  So in conjunction, the plans appear more generous.  But perhaps not as much as first meets the eye.  Harvard has said that it is committed to paying $3 million per year for this new plan.  But if your $40,000 tuition payment is waived, then you can borrow $40,000 less than you otherwise would, which means that Harvard will have to forgive precisely $40,000 less in loans--a wash.  In theory, Harvard could be saving in loan-forgiveness expenditures the same $3 million it is paying for the students' tuition.  It is likely that Harvard won't make back the entire $3 million, of course.  But one can't tell without looking at Harvard's actual expenditures for the two programs, and that information will not be available until they both have been put in operation.  If the additional expenditures turn out to be small, then so will the effect on students' incentives.

Well, if Harvard is being even a little more generous, that's a good thing, isn't it?  It depends on what you mean by generous.  The money has to come from somewhere.  Harvard does not have shareholders who earn lower returns because of this program.  Perhaps, some donors are giving more to fund this program, or perhaps Harvard is paying its faculty less, or maybe students who get law-firm jobs are paying more. So it's not so much Harvard that is being generous as its donors, faculty, or students who prefer to take a law firm job.  Is this a good use of their money?  It depends on how their money would have been used if this program were not put in place.

Comments

[BAC]

The switch from a rebate (in which tuition is paid then forgiven) to a giveaway (in which no tuition is paid) may significantly increase the number of students that take public interest jobs.

Sure, the ultimate cost to the students may be the same (zero), but the marketing people tell us that free tuition will be much more attrctive than $40,000 tuition (with $40,000 rebate). Imagine Apple either giving away Ipods or selling Ipods at regular price with an immediate offsetting bank account credit. The lines are bound to be longer with the giveaway.

Also, students that are given tuition may be more committed to their public service obligations than those who paid tuition and are working to get it forgiven. We know that people will (strangely) work much harder for a charity if given a t-shirt rather than cash to buy the t-shirt of their choice. Similarly, I expect that students that are given tuition will more faithfully meet their public service obligations than students that pay tuition and seek to have it rebated through public service.

[Uzair Kayani]

Hi Professor Posner,

It is unclear from the note whether the interest charged on the forgivable loan (if any) would be equal to the "interest" charged on the deferred tuition. If the two add-ons are different, we have a problem.

Also, it is unclear whether the hassles (transaction costs) of getting the grant and getting the loan are similar. If person A offers me $40,000 for filling out five forms and person B offers me the same for giving my word, I pick B every time. Ease of entry may affect students' willingness to do public interest work. This is speculation, of course.

[Joan A. Conway]

When Harvard grants tuition concessions to one student but fails to provide this to another student renewing a loan, a question may arise as to whether discrimination exists. An examination of contract law, along with some relevant case law on education, is important in assessing the feasibility of a discrimination claim against Harvard under such circumstances.

Harvard may be able to follow the court's reasoning in some cases that have failed to justify granting negotiated loan concessions to some students but not to others. Arguably, Harvard who grants concessions to a student who negotiates, but not others because they failed to negotiate, has a legitimate business reason.

However, this argument is tenuous. First, if Harvard only negotiates with nonprotected class students and refuses to negoiate with protected class students, such actions may show a direct discriminatory intent. Second, the student may show circumstantial evidence if Harvard negotiates with all students, but only nonprotected class students receive the concessions. Third, if a protected class student shows that Harvard's business reasons are merely pretextual, Harvard may be liable for violating the law(s).

Hence, if Harvard is going to negotiate a loan or loan renewal, they should give all students an opportunity to negotiate the terms of the loan or the renewal to avoid any potential claims of discrimination.

[Michael Machen]

This new program saves HLS money since they will no longer have to pay interest on 3rd party loans (40K for five years at 7% costs $16K in interest). Although I suppose this may cost HLS money if they put tuition into their 20% return endowment...

I am curious to know how HLS will enforce repayment if an alumni accepts the tuition waiver and then decides the day after graduation to go to a big firm job. A LRAP handles this situation fairly well, but ex ante forgiveness would seem to be more problematic from an enforceability standpoint.

Also interestingly most of these students will likely be in the HLS Loan Repayment plan for their 1L and 2L loans as well as the remainder of their 3L loans. Seems like a financial aid administrator headache since the $$ likely has the same effect. There will surely be situations where an alumnus is ineligible for one program but in good standing with the other; Yikes.

[brian]

I'm more interested in another issue raised by loan forgiveness or tuition waiver. To be sure, fundingone program or the other (or both) should encourage Harvard law students to take relatively low paying public interest jobs. But these programs won't themselves increase the number of those jobs. Is there some reason why it is good to have more people from Harvard (as opposed to other schools) in those jobs?