Congress haggled over lowering the rates on federal student loans for months until reaching a final decision that President Barack Obama signed into law in early August.
While the compromise gives 11 million students lower interest rates on their loans this year, it doesn’t address what many experts believe may be the next financial crisis in America — the $1 trillion in outstanding student loan debt that continues to rise.
But a new plan called Pay It Forward, which started life as a school project in a small Portland State University classroom in Oregon, could signal a new paradigm in higher education funding.
The proposal lets students attend public and community colleges without paying tuition or fees as long as they promise to pay back a portion of their annual salaries after graduation to their schools. It proposes eliminating borrowing for college as much as possible, while reinvigorating the role of shared responsibility for meeting college costs.
“Pay It Forward is not a panacea, but rather a small part of a very large picture,” says Mary King, economic instructor at Portland State, whose students and a couple of political activists helped push legislation to create the plan. King hopes the proposal will “take Wall Street out of the student loan picture in a real way.”
The Evolution of Pay It Forward
The plan germinated from a place where 20-somethings were thinking about a potentially bleak financial future: a class of seniors at Portland State University. A project in their “Student Debt: Economics, Policy and Advocacy” course led them to explore potential remedies to the student debt crisis on a state level.
The course instructors were Mary King, an economics professor, and Barbara Dudley, a longtime political activist in Oregon and a co-founder of the Oregon Working Families Party (WFP). While the students were analyzing the student debt dilemma, Dudley scrutinized “Pay It Forward and Back,” an idea shaped by John Burbank, executive director of the Economic Opportunity Institute, a non-profit policy group based in Seattle, Washington.
When Dudley introduced the notion to her students, they were enthusiastic. As tuition and other college costs climb, and public funding for higher education declines, an increasing number of students must borrow money for college. About 60 percent of the country’s 20 million college students now borrow annually to help cover costs — that’s up from 45 percent in the early 1990s.
King’s students decided to push for passage of the plan as their senior class final project. They enlisted the Oregon Center for Public Policy to help run numbers for their presentations and they began contacting aides from the Governor’s office as well as various state legislators. Fortunately, one of the elected officials they contacted was Rep. Michael Dembrow, chair of the House Higher Education Committee and a teacher who shared the students’ enthusiasm.
With support from Dembrow and the Working Families Party (WFP), Pay It Forward was introduced to lawmakers in Congress. The students-turned-lobbyists also convinced state Treasurer Tim Wheeler that a bond proposal could pay for the program’s startup costs.
U.S. Senator, Jeff Merkley was brought on board, and just nine months after the class began its investigation, and to the welcome surprise of many of its supporters, the bill passed unanimously in both chambers.
Oregon Governor John Kitzhaber on July 29 signed the bill which appoints a commission to study Pay It Forward and recommend whether the state should institute a trial program.
How Does Pay It Forward Work?
Students would be guaranteed free access to any of Oregon’s two- or four-year public colleges. After graduation, they would pay a percentage of their income into a state trust fund via a deduction from their post-graduation paychecks.
If they attended a four-year school, the deduction would be 3 percent of their adjusted gross income and 1.5 percent if they graduated from a community college. Those who attended some college, but failed to graduate, would pay a pro-rated portion of their incomes. The reimbursement would continue for 24 years.
Pay It Forward mimics Social Security’s universality, because everyone pays into the program to receive its benefits – although in this case, it’s a college education rather than a sustainable retirement.
Much like Social Security, the amount of money paid into the trust fund will differ among its participants. As such, it is a redistributive system with high achievers helping those who graduate into low-paying work.
For example, a student whose adjusted gross income is $750,000 over two dozen years would pay $22,500. A student who makes $2 million over the same time period would end up paying $60,000 for the same four-year degree. Conversely, someone who makes nothing at all would pay nothing, yet still possess a tuition-free and debt-free diploma.
In this way, Pay It Forward is unlike a traditional college loan, because graduates are not reimbursing a lender (with interest) for their own college costs, but rather contributing to a dedicated fund that keeps higher education accessible and available for all who come after them.
Pros and Cons to Pay It Forward
Proponents say the plan has several advantages over the current system of paying for college via loans, grants, scholarships, and private expenditures.
- It removes the up-front tuition barriers that keep low-income students from considering a college career.
- After startup funds are exhausted and graduates begin paying into the system, Pay It Forward is expected to support increases in college enrollment, making higher education more accessible to future generations of students.
- It allows graduates to choose work and careers based on their interests and skills rather than on financial need.
- Students can still take out federal student loans to cover the costs of living not paid for by Pay It Forward.
- It will help lessen the need to take out high interest student loans on which private institutional lenders continue to make significant profits.
However, even with all its potential advantages, the plan’s staunchest advocates also appreciate its built-in limitations: It will only apply to public colleges, not private ones, and it only covers tuition and fees – not the cost of living expenses that can double the amount necessary to attend school.
Pay It Forward will do nothing to help already indebted student borrowers.
What’s Next for Pay It Forward?
Burbank says the plan’s quick passage in Oregon has prompted inquiries from several other states, including Maryland, Maine, New York, Pennsylvania, Wisconsin, Vermont, Michigan, Ohio, Texas and California.
“Each state should create its own iteration, with potential variations in initial funding sources and payback procedures,” Burbank said. In fact, in his home state of Washington, there are currently 10 different versions of Pay It Forward being considered.
But there are obstacles that still need to be overcome before the plan can ever be fully realized.
- A bond initiative to raise the program’s startup costs must be approved by the voters next November.
- The pilot project must be created by the state’s Higher Education Coordination Commission, and then approved by the state legislature in 2015.
- If the pilot works, the plan will be extended to more schools.
The state’s students, who continue to take the lead in promoting Pay It Forward, as well as the program’s other supporters, will continue lobbying their elected representatives and educating the public about the plan’s benefits if they ever hope to see it put in place.
Fortunately, that growing coalition now includes WFP activists, groups like MoveOn.org, and Jubilee USA, as well as many university administrators throughout the state.
If all proceeds as scheduled in Oregon, Burbank said it would take “at least five years after implementation before enough actuarial information can be assembled proving whether or not Pay It Forward is working as envisioned.” It would also be two or three decades before it can become the preferred basis for a new nationwide structure for college financing, according to Burbank.
Will Pay it Forward someday become the new paradigm for financing higher education in America? As of now, it’s much too soon to tell. The Oregon experiment is still in its infancy and has a long, long way to go.
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
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