The Distribution of Benefits from Prepaid Tuition Programs: New Empirical Evidence About the Effects of Program Design on Participant Demographic
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Description
The Michigan Education Trust (MET), was the most widely publicized government action in the field of higher education finance during the 1980s. MET allowed parents of young children to purchase contracts that would later pay for tuition at Michigan's public colleges. MET promised to protect parents against the perceived risk that college would become unaffordable by the time their children were ready to enroll. Widely heralded as a bold innovation emulated by other states, MET was considered Governor James Blanchard's preeminent legislative achievement during his two terms in office. Today, the bloom is off the rose. Governor Blanchard is out of office, and MET is in disarray. Concerns about MET's solvency have led the MET board to suspend sales of new prepaid tuition contracts. The new state treasurer describes the program as “a deal that was too good to be true,” and the once-glowing press reviews have turned sour. I have argued elsewhere that students of public policy can learn a great deal from the worst mistake of the MET board. During its first year of operation, the board set prices for MET contracts, and it set them way too low. I believe that this error resulted from the interaction between certain widely prevalent political incentives and the breakdown of the cultural institutions that ordinarily counteract them. Moreover, in the long run this error is likely to redistribute wealth upward in Michigan, assisting wealthy contract holders to the detriment of working- and middleclass taxpayers. In this chapter, however, I shall argue that students of public policy can also learn a great deal from the most admirable action of the MET board. During its third year of operation, the board decided to change the terms on which MET participants could pay for their contracts. The board authorized the sale of contracts under a “monthly purchase/payroll deduction plan,” hereafter referred to as the monthly payment option (MPO). The hope was that families who could not afford to pay the total cost of a MET contract in advance would be able to buy the contracts on the installment plan. This change in policy provides an interesting natural experiment. Do the terms of purchase really affect the income distribution of program participants? Was the state able to induce more lower-income families to participate by (in effect) offering to lend them the purchase price? More generally, is the skewed distribution of participants in prepaid tuition programs primarily a function of credit market failure-the inability of low-income families to borrow against future earnings? This chapter first describes the early history of MET, from Governor Blanchard's initial call for the creation of a “Baccalaureate Education Savings Trust” through the sale of approximately 39,000 contracts in the fall of 1988. It then summarizes a critique of MET that I published in the summer of 1990 and the political response to that critique—in particular, the decision in the fall of 1990 to establish the monthly payment option. Next, it examines data about the distribution of monthly payment option contracts to determine the distributional consequences of the new program. Finally, it offers some general interpretations of these findings and suggests their significance for future policymakers.
Source Publication
Prepaid College Tuition Plans: Promise and Problems
Source Editors/Authors
Michael A. Olivas
Publication Date
1993
Recommended Citation
Lehman, Jeffrey S., "The Distribution of Benefits from Prepaid Tuition Programs: New Empirical Evidence About the Effects
of Program Design on Participant Demographic" (1993). Faculty Chapters. 1082.
https://gretchen.law.nyu.edu/fac-chapt/1082
