Right but that only works when people don't have a realistic ability to understand their future earning potential.

If I can calculate that my earnings over the next 20 years should be $2mm and 3% of that is $60k I can look at the $60k number and compare it with the amount of debt I'd have to go in to pay outright and do a calculation. If I only need to pay $10k/year in tuition that comes out to be $40k instead of $60k and I'd be foolish to accept the school's proposition.

This is the same problem with why insurance companies don't want to offer insurance for people with a pre-existing condition. Many conditions are expensive enough to substantially raise premiums. The people with those conditions are in a better place to know if they have higher than the premium costs or lower than premium costs. Those with higher than premium costs would like to purchase insurance because they get their care at a discount, since the insurance company only charge people for the premiums. Those with lower than premium costs won't pay because they know they're not getting their money's worth out of the premiums. So the pool of candidates for insurance that covers pre-existing conditions (at least under the premise that insurance companies are allowed to price as they have been) self-selects to only those folks who have a reasonable expectation of saving money. This happens no matter what level you set the premiums at.

If people have the option to either pay up-front or choose the 3% plan there will be a good correlation between people choosing the plan and paying less than they would up-front, and people choosing to pay up-front and paying less than they would on the plan. So the economics don't work.

If they're smart and anticipate this problem and say "this is just how it works at this school" they might be able to succeed if the school confers a substantial advantage relative to other alternative schools. Say Harvard or MIT or Stanford. But if not, nothing compels people to go to a school where they would pay more for their education than at another school and thus many of the people who anticipate being high earners would probably choose alternative and the economics don't work again.

The next evolution of the idea would probably come by way of saying "okay let's adjust the percentage based upon the actual cost of the degree and the expected future earnings" which would make the higher earning degree programs look like excellent deals and lower earning degree programs look like worse ones. This would be a refreshing bit of honesty from a university, helping students make wise decisions instead of simply pocketing their money without offering any real advice but I digress. This then puts the different degree programs in the position of trying to determine who to let in to the now more sought after programs and who to reject since they're going to have an increase in applications. They're going to have to speculate on the future earning potential of all their students because if they break the distribution they go broke.

That makes a college akin to an angel investor; putting a small amount of money into many, many deals and hoping that they end up bringing in enough after the 20 years is up to keep in business.

I am not optimistic that colleges will do a good job of managing this risk effectively and selecting properly.