Student Debt Horrors: Can 'Pay It Forward' Solve the Crisis?

NEW YORK (MainStreet) — Not long after I started law school, I was having lunch with a friend. Being law students, we were talking about debt.

My friend had an idea. It wasn't an original idea, but it was a good one, and it went something like this: what if, instead of collecting debt-fueled payments for tuition, schools themselves had to put some skin in the game? Instead of collecting a fixed tuition, universities would be entitled to a percentage of alumni earnings for a certain number of years. The better the graduates do, the better the school would do and vice versa.

Well, it looks like someone in Oregon may have been at the next table, because starting soon that's exactly what's going to happen.

Under a bill passed unanimously by the state legislature this summer, Oregon has decided to pilot Pay It Forward, a program to waive tuition for state universities in exchange for a fixed, low percentage of students' income after graduation.

This is based on a model used in the United Kingdom and Australia. It was proposed as a solution to the student debt crisis, according to Portland State University Director of Communications Scott Gallagher, by a class taught by P.S.U. professors Mary King and Barbara Dudley.

Under the Portland State proposal, four-year graduates would pay up to 3% of their income for 20 years after graduation, and community college students would pay 1.5%. Students who do not graduate will still pay, but at a pro-rated amount based on their time spent in school. Although no one would pay traditional interest, most graduates would end up paying more than the value of tuition, thus helping to account for rising costs and inflation and "paying it forward" for the next generation.

The immediate savings are substantial. Currently tuition at Portland State is $2,125 per semester for a full-time, resident student and $6,181 for a non-resident. At the University of Oregon those numbers are $2,167 and $3,895, respectively.

Some benefits to this system practically jump off the page.

Instead of graduating thousands of young people crippled by mortgages at age 20, Oregon students could walk out with a debt load made manageable by definition. They would never pay more than a small percentage of their income, because that's all they would owe. This is compared with the average college graduate in 2013, who owes $35,200 in interest-bearing loans by the time he puts on a cap and gown.

That level of debt, at a time when young people should be investing in first houses, buying new cars and starting families, has already made itself felt across the economy in fairly significant ways. That trend is only likely to increase, even disregarding what some have called the "student loan bubble" that's been building over the last decade.

However the plan is not necessarily a silver bullet.

Several major issues remain to be solved before Oregon can call this a workable program. In particular will be implementation. Any large scale rollout of Pay It Forward would suddenly deprive the entire university system of tuition dollars, not just for four years but until the first graduating classes began earning a meaningful income. Some estimates put the cost to the state as high as $9 billion to cover this deficit.

Changing the tuition model could also trigger the law of unintended consequences.

"The devil's kind of in the details," said Diane Saunders, director of communications with the Oregon University System. "I think some campuses would be a little bit concerned that it if was used exclusively, that you wouldn't get as diverse a student population in terms of the degrees that are pursued."

A problem, Saunders said, is that a program like this could most advantage students who "borrow high and earn low." Traditionally higher earning majors such as engineering and pre-medical studies could wind up at a disadvantage since, under an exclusive Pay It Gorward plan, they would end up footing a considerably higher bill on average than their counterparts in the English Department. The University System wants to make sure it doesn't drive those students away to private or out of state schools if traditional loans begin to look more attractive.

Another issue is collection. As students put the campus behind them, how aggressively will schools have to work in order to not only collect but do so accurately based on changing incomes over time?

Still, on the balance, this kind of outside the box thinking has the potential to help thousands of students who want to get an education without crippling their future.

"There are certain borrower categories that are most at risk," Saunders said. "The lowest income students are borrowing significantly just to get by, they don't even have parental help... And a lot of those students really want to give back and help in ways that they were helped, so they go into criminal justice or social work where they don't tend to make the big bucks."

The details of Pay It Forward have not yet been decided. The legislature has called for a pilot only, and the program is currently at the "let's look at this and see if it has legs" stage, according to Saunders. The next steps are a study, followed by a specific proposal from the Higher Education Coordinating Commission due in 2015.

--Written for MainStreet by Eric Reed, a freelance journalist who writes frequently on the subjects of career and travel. You can read more of his work at his website www.wanderinglawyer.com.

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