Commentary: Is Free College Really Free?

InsuranceNewsNet

By Michael Jay Markey Jr.

Why is it that everyone born after 1980 seems to think college should be free? Is there really such a thing as free?

K-12 public education is free - oh wait, nope, I pay for it with property tax. The public roadways in my home state of Michigan are free - oops, I guess not, we pay a road tax on every gallon of gasoline and pay annual registration fees for our vehicles.

There is no free lunch. Nothing is free, unless you’re at an Australian McDonald’s and order 11 hamburgers, ask for 10 to be sans the burger, giving you a zero balance after the applied price reductions for no-burger—you can thank me later for that useless life hack (another wonderful, useful, addition to this world brought to you by us millennials).

Back to the “free” college idea, which has been made popular by every millennial’s favorite old, overweight, red-cheeked, white guy with stark white hair. No, it’s not Santa Claus. It’s Bernie Sanders. Although, like Santa Claus, Bernie wants to provide us all with “free” presents, you just have to close your eyes, not ask questions, and believe. I can almost hear the bell … um, not quite. Sanders’ “free” college comes with a price tag of $70 billion, according to his own 2016 estimate. So, I ask you, who’s going to pay the piper?

To be fair, Sanders claimed he would “Robin Hood” the money from Wall Street by adding a speculative trading tax. It sounds good, but in the end, isn’t all trading speculative? And further, can you recall a time when an additional tax, regulatory cost or any other profit-margin-ruining activity was actually absorbed by Wall Street, or for that matter, any financial services firm? In the end, aren’t these costs more likely to be ultimately absorbed by the consumer? So let’s just assume that we, the taxpayers and consumers, will ultimately bear the $70 billion, either through increased taxes or increased costs.

OK, so you and I are going to pay the $70 billion. But is $70 billion really $70 billion? I guess it depends what the meaning of is, is. Is $70 billion what it will cost, or is it what it would cost if enrollment and costs stay the same as they are today? The answer is the latter, but why wouldn’t things stay the same?

Think of it this way: What if Pepsi were suddenly half the cost of Coke; then wouldn’t more consumers find Pepsi to be more than OK? Yes, there would be some diehard Coke fans who wouldn’t give up their beverage, but Pepsi’s sales would increase. Likewise, if public college were suddenly “free” (I use this loosely because, like I said, there’s no free lunch), then can’t we assume the current ratio of private to public enrollment would further sway in public’s favor?

Do you agree that people love free stuff? If you don’t believe me, go grocery shopping on the weekend and watch all the people eat the free samples. Shouldn’t we expect that “free” college would entice lower earners to enroll in college? Not all but certainly some.

Let's Look At Taxes

Looking at the IRS tax return data from the 2016 tax year, which I’ll continue to use later, I found there were nearly 21 million returns from filers older than 26 but younger than 65, with an adjusted gross income of less than $20,000. They’re old enough that it’s unlikely they’re in college, but they are young enough to consider going.

Let’s put this together. As of 2018, there are 14.8 million public college students. But, Sanders’ $70 billion estimate excluded some students due to income. If only 20 percent are excluded, then the $70 billion price tag covers “free” tuition for 11.8 million students. Now add one-third of each group mentioned previously, since we agree some private students and some lower-earning non-students are likely to enroll in public college because it’s “free,” and enrollment is increased by 8.6 million students. Therefore, $70 billion is not $70 billion; it’s $121 billion annually. Did I mention that this is an annual cost? It is. It’s $121 billion annually!

Since we agreed that the taxpayers will ultimately cover this tab, logically we must ask, how will we each pay? We have a progressive tax system, meaning the bottom 50% of filers will pay 3% of the total federal taxes, while the top 50% will pay 97%. Therefore, we expect different groups to bear different amounts of the “free” college liability.

Let’s use filers with an AGI of $40,000-80,000 or, to make it easy, $60,000, which is about 25% of all filers. They currently pay 11% of the total federal taxes, so keeping the same proportions, they’ll be responsible for 11% of the $121 billion “free” college price tag. That’s $13.3 billion as a group, or $755 per return, not per person, since some returns are filed jointly and some as single (the IRS estimates 56% of returns are filed jointly).

If 80% of the joint returns are for dual-earner households, then there’s an average of 1.45 earners per return. Which leads us to this question: How many hours does our average everyday American need to work to pay for this?

Using figures of $60,000 average income per return, 1.45 earners per return, and 2,000 labor hours per earner per year, we get an average hourly wage of $20.68. Adjust this by the average effective federal tax rate (7.8% for this group) and FICA, and the net hourly wage drops to $17.50. Thus, each earner must work 43 hours without pay each year to pay for Bernie’s “free” college.

I told you there’s no such thing as a free lunch. But it’s gets worse when we look at this over the course of one’s expected work life.

Progressives, like Sanders, demand “free” college largely due to the runaway cost of college tuition, right? Sure. Over the last 20-30 years, college tuition has considerably outpaced the consumer price index. Although it has recently slowed, their 17-year moving average ratio has remained historically high around 2.5:1. Therefore, if wages were to keep pace with CPI, which many argue they haven’t for the income group we’ve chosen, then the number of hours required to pay for “free” college exponentially increases over time.

If we use a 3% CPI and a 7% tuition increase (lower than the 2.5 ratio), then our average everyday American must work nearly 4,000 hours over their expected work life.

Should We Work For 'Free'?

This brings me to a very interesting question.

What if Bernie Sanders said every 18-year-old American citizen must serve in the U.S. military for two years, without pay? Would it be unconstitutional? Would today’s generation fight for this? Would Sanders still be the Santa Claus of politics?

There would be an outcry, but isn’t this exactly what he’s asking every working person to do? Work a few hours for free, each week, month and year so that college can be “free?”

What if I told you we already have “free” college and “free” health care? Absurd? Shocking? No, it’s the truth. It’s called the armed forces. If you want it “free,” then go and serve our country and it will be “free.”

My sincerest gratitude and thanks to all of you who have served. Thank you!

Michael Jay Markey Jr. is a co-founder and owner of Legacy Financial Network, Kentwood, Mich., and is the author of Fireproof Your Retirement. He may be contacted at [email protected].