Posted Wednesday, March 19, 2008, at 10:40 PM
Phillip 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.