Is Oregon the State to Save Us From Crushing Student Loan Debt?

Like many of my fellow millennials, I was disgusted this past week when, rather than fix the present student loan debacle, Congress instead opted for its usual solution of … absolutely nothing. So imagine my surprise when I saw, the same week as that disgraceful display, one state trying something radically new to try to fix this mess. Imagine my further surprise when I realized that it might just work.

Oregon’s state legislature voted unanimously last week to begin a pilot program aiming to ultimately switch its public universities to a tuition-free system called Pay It Forward, Pay It Back. Under such a system, students would pay no particular tuition upon entering university but would instead pay 3% of their paychecks for the next 24 years after graduation. Two-year college grads would pay 1.5%, and people who attend but don’t graduate would pay a prorated portion. Such a system would be an immense relief to students struggling to find any jobs at all, never mind ones that pay the amount necessary to pay back student loans plus interest.

One part that is still a little murky is how the plan would handle a student who fails to find a job and thus doesn’t earn income. However, the Oregon Working Families Party, which actively promoted the bill, says on its site that, “If you aren’t making income, you aren’t contributing to Pay It Forward. When you start making income again, your monthly contributions to Pay It Forward will continue as normal.”

The architects of the plan hope to get the pilot program up and running by 2015. One of the problems that they still need to solve is how to fund the program up until students educated under it graduate and begin to pay the 3 percent back. The state government would likely borrow the seed money, which could top $9 billion.

There have been some criticisms of the plan. The Wall Street Journal quotes Dave Girouard, the CEO of a company that provides capital to professionals in exchange for a guaranteed share of their income, as saying that “… the Oregon plan could suffer because it might turn off students with the biggest earning potential, for whom traditional interest rates would be preferable to promising a share of future income. What you don't want is a program filled with ‘people who don't intend to work as hard or have a bias toward earning less money.’”

However, that criticism is based on the idea that students know what they’re going to make straight out of college when applying. In a situation in which jobs are scarce and a lot of people are just grabbing what they can get when they’re starting out, it seems intuitively more likely for students to be risk averse in order to keep from getting buried early on. Indeed, Australia’s experience with a similar program (HECS) can be instructive. Although it took time for the returns to be large, the revenue from the program has actually been used to fund a major expansion in Australian higher ed since its introduction a quarter century ago.

By the way, conservative devotees of Milton Friedman, this is actually very similar to one of his ideas, a contract between the student and the state. And in fact, conservatives in the Oregon legislature, which, to remind you, passed it unanimously, used very similar terminology in explaining their support for the bill.

If such a program winds up being successful, it will probably be picked up by other states relatively quickly. Everyone, after all, wants a solution to the student loan problem. And while Congress is paralyzed, it will be up to the states to pick up the slack.