It’s not surprising that a group of students would come up with a plan to try to eliminate the need for student loans. Some state legislators across the country have quickly embraced the concept, but without thoroughly examining the proposal, which could end up costing many students more money than they are currently paying for their loans—or even more than their total tuition.
That’s just one of several potential challenges facing the idea, which was proposed in December by students at Portland State University, in Oregon. Under their plan, called “Pay It Forward,” students could defer the cost of college tuition while they were enrolled. Instead, for 24 years after graduating with a bachelor’s degree the students would pay 3 percent of their annual earnings into a special fund used to cover the costs of students attending public colleges. In that way, current students’ costs would be borne by the payments of former students.
Lawmakers in Oregon latched onto the idea and overwhelmingly supported a bill, signed by the governor in early August, to study and, possibly, to create a pilot program based on the students’ proposal. While that’s a long way from becoming reality, the idea has spread to at least four other states—New Jersey, Ohio, Pennsylvania, and Washington—where lawmakers have expressed interest in similar legislation.
“By placing a limit on the amount students pay ... new graduates wouldn’t be burdened with excessively high monthly student-loan payments, and would be able to commit greater amounts of their income to economically beneficial activities,” State Rep. Brendan F. Boyle, a Democrat, wrote in a memorandum to his colleagues in the Pennsylvania House announcing he would introduce a bill to study the plan. Oregon legislators who sponsored the bill did not respond to a request for comment.
But the enthusiasm for such measures reveals either naïveté or willful ignorance about the potential risks and rewards to both students and the state, not to mention basic economics. And it could lead to an even greater shifting of costs from states to students if the trend of declining state support continues at the pace of the past decade.
Math Problems
Supporters of the Oregon plan, which was written as a capstone project in a course on student debt, have identified one major challenge for their proposal: an estimated $9-billion start-up cost, which would have to be covered by state debt or philanthropy. That money would be needed to pay the tuition of students who participate in the plan until the state breaks even, projected to be in the 25th year.
Assuming that $9-billion could be found to begin Pay It Forward, several other basic problems would have to be dealt with, including the possibility that students who expect to earn even a moderate middle-class salary might be better off borrowing from the federal government.
An analysis by Mark Kantrowitz, a financial-aid expert who works for the company Edvisors, shows that graduates who earned an average annual salary of a little more than $55,000 would pay back more to the state than they would have paid for a traditional student loan, including interest and assuming a 2-percent annual increase in salary. A full-time worker with a bachelor’s degree who earned the national median annual salary of $56,000 would pay about $3,000 more to Pay It Forward, adjusting for inflation, than he or she would for a 10-year loan at a 6.8-percent interest rate, according to Mr. Kantrowitz.
That means roughly half of the students who earn bachelor’s degrees would have a financial incentive to not participate in Pay It Forward.
Without high earners paying into the system, the program would probably be unable to cover the tuition costs of lower-income students, who would benefit most from Pay It Forward, raising the cost for the state.
The plan could also encourage students who expect to earn more to attend private colleges and thus avoid the system, Sara Goldrick-Rab wrote in an analysis of Pay It Forward for the Century Foundation.
Growing student debt is the fault of both colleges, which have increased nonacademic spending to create an “elite social experience” for a small number of students, and state disinvestment in public higher education, writes Ms. Goldrick-Rab, an associate professor of educational-policy studies and sociology at the University of Wisconsin at Madison and a senior scholar at the Wisconsin Center for the Advancement of Postsecondary Education.
Inflated Expectations
The original Pay It Forward proposal acknowledged that many students would pay back something extra into the system: An average student who deferred about $32,000 in tuition, and had a starting salary of about $27,000, would pay back an additional $7,400, according to figures from the Oregon Center for Public Policy.
In Mr. Kantrowitz’s calculations, which include an above-average total debt of nearly $30,000, the total interest paid over 10 years for a traditional student loan would be $7,611.
Those figures underscore the point that lower-earning graduates would get the greatest benefit from Pay It Forward.
But even if many higher-earning graduates participated, the program might still not pay for itself because the proposal has not yet accounted for inflation, which continues to drive up spending by public colleges even as state appropriations for higher education have stagnated or fallen in recent years.
In Oregon, such state support fell nearly 20 percent from the 2008 to the 2013 fiscal years, according to the annual Grapevine survey from Illinois State University. Nationally, state spending on higher education fell nearly 11 percent.
Expenses at public colleges, however, increased more than 3 percent from 2011 to 2012—nearly twice as fast as the inflation rate, according to a recent analysis by Moody’s Investors Service.
Accounting for a 3-percent annual inflation rate, students would have to pay back double their tuition over 24 years to cover the costs of a student enrolled in that year—or the state or colleges would not be able to cover their growing costs.
Shifting Burden
All of those factors highlight the greatest shortcoming of the Pay It Forward proposal: While students would be bound to repay the costs of their tuition, there is no guarantee that states would continue to subsidize public colleges at the same level for a quarter century.
While the original proposal speaks briefly about the state’s maintaining its level of support for higher education, it is unlikely that any state legislature would or could ensure that in a statute. There is also no reason that alumni paying in 3 percent of their annual salaries couldn’t be required by law to pay in a higher percentage over time.
Some lawmakers may even conclude that setting students’ contributions by law would enable a state to finally eliminate all support for higher education, Mr. Kantrowitz warned.
“Legislators hope,” he said, “that this is a magic solution that shifts the cost of higher education from the state to the alumni.”
