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.

  • Interesting start for a solution. I wonder if they could repay more to get done quicker. The big problem I see is that it does not cover housing – that is often as expensive, if not more so than the tuition in many cases.

    • All good points John. Part of me would like to see it done as soon as possible, but I also don’t want them to rush it and have avoidable issues bring down the program.

  • It’s good to see more states are starting to think outside the box. I can’t imagine having to pay off loans for that long though. The other issue is what happens if the students don’t pay.

    • Failure to pay is definitely an issue, but I think the nature of the program will encourage more repayment than standard student loans. Even if not everyone wants to do it, it would be a great option to have in place.

  • I read about that in the news. What happens if you don’t make it to graduation? Do you still start making payments?

    • That is a fantastic question! I don’t know. It wouldn’t seem fair to collect 3% for 24 years for someone who didn’t graduate, but at the same time they should still have to pay for what they borrowed. I will have to investigate this further!

  • Not sure I am on board with this plan. It seems like we are trying to fix this issue with gimmicks, rather than solid plans that help people get the skills they need to contribute to our economy. Maybe more incentives for businesses and students to have a partnership as they go through college. Why not work 20 hours and go to school 20 hours and have a small stipend and education covered by the employer?

    • I think this plan is more than just a gimmick. The neat part about it is that nobody is forced to participate. If you don’t want to enroll, you are not required. If you do want to, it is available, and after the start-up costs, it will not cost the taxpayers any money.

  • jim

    I don’t like this plan one bit. Strikes me as just one more way to “dumb down” America and give, yet again, another reason not to go out into the world and make a lot of money. Why earn more when that’s just going to “cost” you more ’cause they’ll be taking 3% of your income. And – seriously? Paying your student loans over a 24 year period? That’s insane. How about busting your butt and getting them paid off in 3-5 years? At this rate, people are going to be retiring (due to medical/age-related problems) AND still be paying off their student loans – not to mention their kids’ too. This is another great way to lull the American public into more dependence on the government.

    • You are not alone in your opinion Jim. In response I would just offer one thought. This plan is simply an option and it is not being forced upon anyone. The approach you advocate is still an option for anyone who wants to pursue it. This new option is likely for those who are a little more risk averse and worried about their job prospects at graduation.