Oregon plan to base tuition on future income could end banks’ college loan gravy train

By Marc Jampole

The Oregon state legislature has passed a bill asking a state commission to consider an innovative plan to charge bachelor degree recipients from state schools no tuition or fees, but instead make them pay 3% of their salary for 24 years after finishing school.  It’s called “Pay It Forward,” based on the turn-of-the-century melodrama of that name in which people pay back good deeds done for them by doing good deeds for others. With the current conception of the plan, students would pay .75% of future earnings for each year of college they complete, so that someone receiving an associate degree at a community college would be responsible for 1.5% of future earnings for 24 years.

Someone did the math: the average recipient of a bachelor of arts from an Oregon state university would pay about $39,653 over a lifetime, about $7,000 more than the actual cost of tuition and fees. That’s not bad—my math concludes that it’s a break-even for a student considering a 10-year loan of $32,500 at 4%, the interest on which is the same $7,000.

Of course, that’s average, which is what I love about the proposal. People who don’t make as much money will pay less and those who make a lot of money will pay more. Paying more when you do better makes perfect sense to me—no attorney can be successful without a degree, because no one will use a lawyer who didn’t go to law school. Just as no one will hire a marketing assistant without a degree. Currently, both the marketing assistant and the attorney pay the same to go to a state school. Under the Pay It Forward proposal, the successful corporate attorney will likely pay more than the average, while the successful marketing assistant who never gets promoted will pay less than average.

The Pay It Forward plan thus automatically creates financial aid for students who can’t afford to go to college, and it seems to do it more efficiently and fairly than the current system. Universities could also continue giving academic scholarships to the very most outstanding students—the scholarships could involve not requiring payback of future earnings or payback at a lower rate.

The conceptual drawback to the plan under discussion in Oregon is that it would only cover tuition. Some students would still have to take out loans to cover living expenses. It seems to me that since colleges operate dorms, there is no reason why all college costs can’t be wrapped into Pay It Forward.

Some are already calling the proposal unfair to the very successful person—say the engineer or medical doctor—who is going to pay vastly more money for college than he or she would under the current system. But the current system isn’t working for most people, because most people have to borrow money to go to college. I see nothing wrong with continuing a full tuition system alongside the Pay It Forward. If a wealthy physician wants to send his brilliant girl to the state law school and pay full rate, no muss no fuss—more power to both of them. But the Pay It Forward system involves a social contract between the college and the individual—the school has no idea how financially successful the individual will be in the future. The school is therefore taking both current risk and part of the future risk. In return, it should expect the individual to take a portion of the future risk, especially since that future risk will always be commensurate with the individual’s reward, since the future payment will be based on salary. 

In a way, Pay It Forward concept is a mirror image of the highly successful Social Security program. What will happen under Pay It Forward is that those who went to college will pay for those who are going to college. With Social Security, those who will retire someday pay for those who are currently retired. 

All of this talk of Pay It Forward is pie-in-the-sky, though. Does anyone think that the bank lobby would allow such a plan to pass and be implemented?

The student loan is the ideal investment for a bank, since it is the only type of loan that does not get wiped away in a bankruptcy! Roughly two-thirds of all students need to borrow money to go to college and college debt now averages almost $27,000 per borrower. That’s trillions of dollars in outstanding loans, and growing!

Banks will never go for a plan in which states finance college education and take away such a lucrative source of income.  And if the history of the government bailout of our economy post 2008 is any indicator, the big banks always get what they want.