Rather, it provides a way to pay back tuition costs as a percentage of income, rather than as fixed payment installments on a loan package. The plan was proposed in a policy paper late last year by Audrey Peck and John Burbank of the Economic Opportunity Institute in the context of Washington State. "Under Pay It Forward, students pay no upfront tuition fees to attend college," Peck and Burbank explain. "Instead, they pay a small percentage of their adjusted gross income (AGI) for a number of years after college: 0.75% per year of community college, or 1% per year of university, for 25 years. Payments are placed in a trust fund that covers the cost for future students to receive the same opportunity to attend college with no tuition fees."
The Oregon system would probably differ in some respects from that model. The actual bill text is very spare and doesn't specify a set percentage or payment period, though the bill's supporters tell the New York Times that something like 3 percent over 20 years would cover costs. And Burbank is quick to note that there would be some substantial upfront transition costs, which, for universal adoption in Oregon, are estimated at $9 billion. "25 years from now, it will be self-financing," he says. "The question is, 'How do we get there?'"
It's a big question. Oregon's commission will have to figure out not only what rate to charge and how long to charge it, but whether one can take a "buyout" by paying off tuition costs early, as is possible with student loans, and how to enforce the plan for students who move out of state. If you can't take a buyout, then students who earn high incomes later on could find themselves paying far, far more than their education actually cost. And if enforcement is tougher in Oregon than out of state, that could provide a perverse incentive for state university graduates to skip town.
How to avoid adverse selection — or, only students who would pay less overall under the plan signing up for it — also is a concern. "If you're going to make everyone pay 3 percent of their income, the people who'll do well income-wise are either not going to go to that school, or opt out of the agreement and come up with some other financing," says Jason Delisle, a higher education specialist at the New America Foundation. If only students with low lifetime incomes sign up, then the program won't, actually, be able to pay for itself.
One way to get around that is to charge different percentages to different students, based on how much they're expected to earn. That way, engineering students — who can expect high salaries — might pay less as a share of income than, say, comparative literature majors. Miguel Palacios, a finance professor who literally wrote the book on financing college by charging a percentage of the students' future income, supports this tactic. In his plan for "human capital contracts" — inspired by an idea of Milton Friedman's — students and investors would sign contracts for the former to pay a percentage of income back to the latter, who in turn provides tuition money upfront. "To prevent adverse selection, the percentage of income that investors require from each student should accurately reflect the future earnings potential of the student, including the possibility of a very successful economic future," he writes.
But that assumes that investors can accurately predict students' future income, which, as Palacios concedes, You could have the percentage fluctuate to compensate for that — perhaps with a cap that can't be exceeded, so students aren't overly burdened — but that, along with charging different students different rates, eliminates some of the predictability that makes plans like the one considered in Oregon attractive. What's more, charging science major and humanities majors different shares of income raises deeper philosophical concerns. "If it is in society’s interest to have individuals pursue fields of
study that do not typically yield high monetary rewards," Palacios concedes, "it can be argued that human capital contracts could create incentives to act against what would appear to be society’s larger interest."
Perhaps the most confusing thing about the Oregon plan is that something very similar already exists for federal student loan programs. The Department of Education's Pay as You Earn program lets borrowers after 2007 pay back federal loans by paying 10 percent of their disposable income every month for 20 years, after which the remainder is forgiven (it’s 10 years for people in public service careers).
The program, called “income-based repayment” (which, confusingly, has also become a catch-all term for this set of policies) does the same thing for older loans, only with 15 percent of disposable income payments, and forgiveness after 25 years (10 for public service). There’s also income-contingent and income-sensitive repayment, which work similarly. You can even use income-based repayment or income-sensitive repayment to pay back Federal Family Education Loan (FFEL) loans made by private lenders but guaranteed by the federal government.
If Oregon makes "Pay It Forward" universal, it would shut off this, and any other, loan-based repayment route. Pay It Forward will probably be better for some, but making it the only option would hurt people who do well under income-based repayment, such as those who do public service work and get their debt forgiven in 10 years. "For some people, particularly people with lower incomes, and in public service, federal loans will be a better deal," Delisle says.
Burbank emphasizes the fact that the Oregon program wouldn't technically be a debt. It'd just be an amount of money that you have to pay back to someone who gave you the money in the first place. But not a debt. "The difference is that the Obama administration's programs are based on debt," he says. "You're paying off a debt. Pay it forward is not based on that. It's not a debt instrument. You get to go to college in a debt-free manner from Pay It Forward contributions taking the place of tuition. Then, after you've gotten this debt free college education, you contribute yourself."
That does matter in some contexts. Not having an existing student debt burden could, for example, translate to better credit for Oregon college students, which makes getting credit cards, mortgages, and so forth easier. But there's no guarantee that banks wouldn't treat the Oregon levy as equivalent to student debt obligations. And when it comes down to it, the differences between Pay It Forward and federal income-based repayment are pretty minimal. The major one — that the initial money comes from the state of Oregon, which needs to balance its budget, rather than the federal government, which doesn't, ever — doesn't argue in the Oregon plan's favor.
The rapturous coverage the Oregon proposal has gotten, however, is a symptom of what a serious PR problem income-based repayment has. People just don't know about it. It's not universal, and it's not the assumed way that people pay off loans. But that could change.
Reps. Tom Petri (R-Wisc.) and Jared Polis (D-Colo.) have proposed a bill, called the Earnings Contingent Education Loans (ExCEL) Act, that would combine the three major federal student loan programs (subsidized and unsubsidized Stafford loans, and graduate PLUS loans) into a single loan program (Perkins loans and parental PLUS loans would still exist). That program would use income-based repayment, with participants paying 15 percent of their income in excess of 150 percent of the poverty line every year. The program would use income withholding, similar to how income tax payments currently work. Debts wouldn't be forgiven after 20 years, unlike the current system, but interest wouldn't compound, and would be capped at half the total loan amount.
If you like the idea of payment based on income, but don't want people to pay more than their education actually cost, and want a system enforced by an institution that both has a lot of experience running this kind of thing and can print its own money, the Petri-Polis bill is probably a better bet than what's being tried in Oregon.