Proposed Oregon Student Loan Alternative Offers Pluses, Minuses

Equal Justice Works
U.S.News & World Report LP

Last week we talked about a venture capital company that plans to help students and graduates pay for higher education by providing funds in return for a share of future income. Of course, this is not a funding model that is limited to private companies.

As U.S. News has previously reported, Oregon has decided to experiment with a similar model in order to fund its public higher education system. And recently, Sen. Jeff Merkley, D-Oregon, introduced similar legislation in the U.S. Senate.

Oregon's legislation orders the creation of a pilot program called Pay Forward, Pay Back. It will be limited to state residents and it will replace tuition and fees with a binding contract to pay a certain percentage of students' annual adjusted gross income for a certain number of years after graduation.

Because it's a pilot program, these numbers aren't set, but would vary at every participating school. However, the Oregon Working Families Party, which originally pushed the bill, had initially proposed around 1.5 percent of income for community college and 3 percent for a four-year school over 20 years.

[Discover how to get student loan help from employers.]

Obviously, this is a far more broad-based and comprehensive plan than funding higher education via venture capital. The idea of current graduates "paying it forward" for future students is intuitively appealing.

Assuming it goes as planned, most graduates - although, as with the venture capital model and the current student loan system, they are functionally repaying with interest an investment others made in their education - should be making affordable payments for a delineated period of time without having to technically "go into debt."

The Oregon plan, as it is currently conceived, does not cover expenses such as room, board, books and other supplies. Students from lower-income families will still have to borrow to cover these costs, leaving them with both a traditional student loan bill and on the hook for 20 or so years of paycheck deductions.

Given that, students considering an institution of higher education that uses this system would be well advised to also figure out how much they would have to borrow and repay in the traditional student loan system before opting in. In making this calculation, they should consider the net price of alternative institutions, which deducts scholarships and grant aid.

[Find out how to pay for college without student loans.]

The Oregon plan promises affordable payments and an end date for repayment, which are all positives. But students should remember that federal loans - via income-driven repayment plans - have similar protections. And federal loans have opportunities to earn 10-year Public Service Loan Forgiveness that the Oregon plan lacks. These should also factor into students' decisions.

The language in Oregon's legislation suggests this is the case, but we hope that the Oregon plan, like the federal income-driven repayment plans, will allow payments of zero dollars for graduates whose income is below 150 percent of the federal poverty level for their family size. Students will want to examine the details of the pilot programs carefully, because 3 percent of your income when you are at or even near the federal poverty level is a significant expense.

Along the same lines, legislators may want to consider a more progressive repayment structure. Instead of everyone from the same type of institution paying the same set amount, perhaps those making more should pay a slightly higher percentage of their income.

[See ways to save on college costs.]

Most importantly from a policy point of view, legislators should ask if the Oregon plan will constrain or exacerbate the ongoing rise in tuition. The Student Loan Ranger suspects it will exacerbate it.

First, incremental increases to the percentage of income they have to pay will seem slight to students but will result in large funding increases for schools. As a result, schools will be incentivized to collectively push for small, regular increases and opponents will find it difficult to mobilize students against it.

Also working in the favor of increased costs will be the necessity for states to balance their budgets. Pushing more of the costs of future funding onto the backs of current students will help alleviate budget pressures and free up spending for other priorities. Since those who have already graduated will not be affected, and since the future paycheck deductions will be virtually invisible, the political risk for politicians will be slight.

Philosophically, it's also worth noting that all of us benefit from having an educated populace. It's worth asking if the obligation to help out future generations should end twenty years after we graduate, or if it should continue a bit longer.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.