For one thing, it does nothing to address room and board costs. At many state universities, this is more expensive than tuition. Students can sometimes save money by living off-campus, but most schools prohibit them from doing this for at least their first two years of college.
Second, will this encourage universities to eliminate programs that don't yield high-paying graduates? And won't students who are likely to be high-earners disproportionately opt for traditional student loans? If that happens, where does the money come from?
We of the Atlas Forum tend to forget that going away to college at age 18, living on or near campus for 4 years and then graduating is not the norm for anywhere near the majority of college students. Going to a community college and later transferring; going part time over a period of several years; living with parents or a spouse or partner and commuting - these are the things the majority of college students in America are doing.
I'm assuming the money you're paying back from getting your degree isn't getting earmarked for the specific school/department where your major was located. I'd imagine it would be no different than the inflow of money from tuition and tax dollars. If you're paying tuition for a BA in women's studies, your tuition isn't going directly to the women's studies department and staying there. It's going into a big fungible pot with everyone else's.
Under the current system, programs with low operating costs effectively subsidize programs with higher operating costs. Part of the reason so many universities opened law schools during the last decade was that in addition to greater demand for JDs, law schools are relatively cheap to operate. Your only costs are the faculty and classroom space. So when a JD student is paying that tuition, it's covering the cost of getting that degree and then some. The "and then some" is subsidizing high-cost activities like the research in the medical or engineering schools, which often require expensive equipment and large numbers of staff.
Under this system, the high-payoff programs (those whose graduates go on to earn high salaries) are subsidizing the low-payoff programs. That's not a bad thing. Teachers never make a lot of money (contrary to Krazen's delusions), but that doesn't mean they're not important and we should get rid of education majors.
