In Oregon, a proposed pilot program would allow students to attend state college tuition-free. The catch? Instead of taking out loans and piling up debt, students agree to pay the state back a small portion of their income over the course of a couple decades.
When is a loan not a loan? And if you still have to pay it back, is it a loan no matter what you call it?
These might sound like topics for debate in a college philosophy lecture; in fact, they’re questions lawmakers and educators in Oregon are considering as they contemplate an alternative to student loans. The Oregon legislature directed its Higher Education Coordinating Commission to create a pilot program for what has been dubbed the “Pay It Forward, Pay It Back” plan.
In theory, the program works like this: A student going to a state college in Oregon wouldn’t take out any loans or owe any money for tuition while earning a degree. Instead, upon graduating the student would pay the state back a small percentage of her income for 20 to 25 years. The amount of repayment would be 0.75% of the student’s annual income per year of schooling — so, for example, someone who got a 4-year bachelors degree would pay 3% of income for 20 to 25 years. The money would go into a trust fund set up to fund future generations of students.
Oregon isn’t the only state considering such a program; neighboring Washington has also looked into the feasibility of a “Pay It Forward”-like system.
“It’s sort of a broader social program,” says John Burbank, executive director of the Economic Opportunity Institute, a group that has researched how this kind of model would work in Washington state. “The program this is most akin to is Social Security.”
Supporters claim the proposed program, a version of income-based loan repayment, could free graduates from being burdened by years of debt. But skeptics say it would drive the brightest and most ambitious students away from state schools, out of fear that they’d see a portion of their (likely substantial) income taken away by the state for more than two decades.
Other income-based repayment programs currently exist. The United States already has a federal income-based repayment program, but higher-education advocates say it has too many restrictions and forces students to jump through a lot of hoops in order to qualify.
A lack of awareness surely doesn’t help, either. Despite a push by the White House to educate the public about the program, Lauren Asher, president of The Institute for College Access and Success, told U.S. News & World Report last year that it remains under-utilized. “Far more people could be benefiting from it right now,” she said.
In Australia and the U.K., income-based repayment is the norm; here, it’s a headache — and that’s if you even know about it. Because relatively few Americans understand how these programs work, let’s clear up a few things.
Is income-base repayment still really just a loan? “It’s a loan by another name,” says Sandy Baum, senior fellow at the George Washington University Graduate School of Education. Since at least at the outset the money to fund the program would probably have to be borrowed via bonds issued by the state, Baum says those borrowing costs would be baked into the repayment formula.
And students would still have to make good on their end of the deal, perhaps by having their payments deducted directly from their paychecks the way Social Security is now.
How do states pay for it? Even supporters acknowledge that this is a hard question to answer. Burbank says a model calculated for Washington state would take 25 years to get into the black; in the meantime, it would cost as much as $1.4 billion a year before dropping. “Those appear to be pretty big transition costs,” he says.
Will enough people get on board? “Students of all income levels would participate, so it’s a sustainable way for the fund to grow,” says Sami Alloy, campaign manager at the Oregon Working Families Party, which championed “Pay It Forward.”
“Conservatives said it appealed to them because it’s a contract between the student and the state, so they see it as a transaction, not as a grant,” one of the students who came up with the plan told the New York Times.
But Baum is skeptical that a program that is redistributive in nature — that is, the 3% kicked in by a software engineer makes up for the 3% paid by a social worker — would ever fly with people who expect to become rich after graduation. “The people who make a lot of money end up subsidizing those who don’t make that much,” she says.”
“It’s a real moral hazard problem,” she says. “If you have no intention of doing anything other than staying home with your kids, this is great for you. If you think you’re going to be an investment banker, you’re going to think really hard,” and might decide not to participate with “Pay It Forward” or attend a state school.
Has anything like this ever worked? Yale University experimented with an income-based repayment plan back in the 1960s, but couldn’t make the model sustainable. Since then, though, interest in the idea has expanded, although few initiatives have been launched.
In Washington, Burbank says his group is working with state legislators, with the goal of following in Oregon’s footsteps and introducing “Pay It Forward” legislation next year. In 2012, students at the University of California at Riverside pitched administrators a plan to replace tuition with a 5%, 20-year income-based repayment plan. UC president Mark Yudof — an administrator who Inside Higher Ed points out has supported previous tuition increases — expressed interest, saying, “We think the ideas are constructive.”
Many of the brightest economic minds think that an income-based repayment plan will eventually be the way to go, in one form or another. Roughly half of the white papers submitted in the Reimagining Aid Design and Delivery project sponsored by the Bill & Melinda Gates Foundation recommended universal income-based repayment. “The papers reached near-unanimity on a few points, and this was one,” an Inside Higher Ed article stated.