Pay It Forward: Oregon’s Novel Approach to Student Loans

Michael Lux Blog, News, Student Loans 10 Comments

One of the sad realities about running a website dedicated to student loans is that much of my time is spend delivering bad news to good people trying to get by.  Today is not one of those days.  The government of Oregon, acting on a suggestion from students at Portland State University, has enacted legislation to create a fascinating new model that could forever alter the way college is funded.  The plan is actually quite simple.  Rather than paying tuition up front, students commit to pay 3% of their income for their first 24 years after graduation.

The Pay It Forward Plan

The Oregon Plan, appropriately named “Pay It Forward, Pay It Back” would allow Oregon students to draw from a fund to pay for their education.  All that is asked of them in return is a tiny portion of their future earnings, specifically 3% for 24 years.  The money paid back into the fund would pay for the education of the next generation of students.  Though there would be significant start up costs (estimated to be $9 Billion), once Pay It Forward is up and running, it would be self funding.

The following graphic demonstrates how repayment would work for the average student:

oregon plan

This remarkable solution would address many of the problems of the student loan crisis.  Predatory lending would become non-existent.  Sallie Mae would be eliminated from the process.  Best of all, recent graduates would be more likely to afford things like a home or marriage.  Such an outcome would be good for the students and the economy.

The Problems

The biggest problem with this plan is that it has a long way to go before it ever sees the light of day.  The fact that last week’s bill had overwhelming support in both the Oregon House and Senate is great, but all the bill did was create an exploratory committee to investigate the viability of the Pay It Forward Plan.  If their findings are positive, it is possible that a pilot program could be started in 2015.

The other issue with the plan is that it would only cover tuition and fees.  Students would still have to find a way to provide for the costs of housing and living expenses.

Finally, though this plan in theory would address almost all student loan issues, it does nothing for the people who currently owe a total of $1 Trillion in debt.

Going Forward

Even though the plan does not address all of the costs of education, it is a giant step forward.  When the founders created a system where states acted independently of the Federal Government, they felt the states would be “laboratories of democracy“.  This is a great example of a state experiment.  If 10 years from now, the youth are flocking to Portland to get the benefit of the “Pay It Forward” system, other states and possibly the Federal Government will follow suit.

Though this plan is far from becoming a reality, it represents tremendous progress.  A small group of students have put together an innovative idea, and now it is part of the national discussion on student loans.  As a nation we now have another potential tool in our tool belt to deal with student loan debt, and we have a reason for hope and optimism about the future.