It’s Still Debt: Oregon’s “Pay It Forward” Program May Be More Feel-good Than Do-good

In the first week of July, the Oregon state legislature unanimously approved a measure to allow a feasibility study to be conducted on a program called “Pay It Forward,” a creative post-secondary funding solution that hopes to address Oregon’s (and the nation’s) skyrocketing student debt. The program has been lauded as the potential savior of a generation of indebted graduates, and it has the support of legislators, policymakers, and alternative political parties in the region.

“We have issues with students borrowing to finance higher education. They are borrowing high and earning low and finding themselves having trouble paying off debt,” reported Diane “Di” Saunders, Director of Communication of Oregon University System (“OUS”) in a July 11 phone conversation. Housed at Portland State University, the Oregon University System currently provides governance for all seven of Oregon’s state universities and ensures that legislative mandates are carried out at the state’s college and university campuses.

Historically, higher education has been considered the path to socio-economic mobility. People with four-year college degrees typically earn $54,756 to their high school graduate friends’ $23.504, making post-secondary education an attractive asset for both individuals and communities who benefit from the resulting economic flow.

The “Pay It Forward” program, if implemented, would allow a student to attend community and state colleges without paying up front in exchange for a fixed percentage of the student’s income once he or she enters the workforce. As written, the payback rate would equal .75 percent per year of school completed, or three percent for a 4-yr degree, and the repayment terms would span 24 years. Current students’ loan repayment schedules run for 10 years.

Inspired in part by Australia’s HECS-HELP program, the “Pay It Forward” program was brought to the Oregon legislature by a group of PSU students working with local policymakers. In place for a quarter of a century, the Australian program sees AUD $6.2 billion  (USD $5.62 billion) currently in default. Issues contributing to default include a portion of that nation’s higher-dollar earners leaving for jobs overseas and escaping repayment, the governments “demand driven” policy which puts no limits on seats (demand drives cost), and lower wage earners being exempt from repayment requirements.

“It’s a creative idea, and we are really proud of our students for bringing it forward,” said Saunders who pointed out though, that, far from adopting the program, the legislature’s “Pay It Forward” vote simply approved a study bill to determine if proposing a pilot program is worthy of pursuit. The feasibility, and not an actual pilot program, will be presented to the Oregon legislature in the session beginning in Feb 2015.

Time isn’t all that might hold up implementation of the bill. “We don’t want to call this debt, but that is what it is,” Saunders noted. Prior to her position at OUS, Saunders worked with a Boston-area non-profit company which, to protect its loan portfolio, absorbed the loan servicing functionality of a failing lender. She has seen first hand the challenges of becoming a loan servicer and pointed out that higher education is not in the business of banking.

Saunders cited four primary concerns she has about the program:

1. Inordinate amount of administrative oversight. The program will require some contractual obligation for students to make sure they enter into repayments. Further bureaucracies will need to be created to administer the financing functions that the current student loan system has built in. Saunders envisions a “department within an agency.” Further, a dual registrar system would also be required if students were able to opt out of the program.
2. Seed funding. Saunders estimated an eight to ten year period for the repayment population to be solidly employed and regularly contributing. Media estimates suggest a $9 billion price tag that the state would need to fund until the program is financially sustainable.
3. Legislative changes. If the funds were available for such aggressive educational funding, legislative limitations have no provision for committing future funds. Each two-year budget stands alone, so that even if that $9 billion were approved, it would have to be re-approved every two years in the midst of legistlative turnover and changes in political will. State laws would have to be rewritten to enable the ability to commit to future funding.
4. Repayment. The door is open to perceived inequity in repayment as higher income students would essentially subsidize students entering majors with paltry income projections. Like the current student loan climate, students with low income earning potential may have difficulty paying into the system.

More than a new program, Saunders would like to see more creative repayment systems within existing loan servicers and more forgiving terms as graduates struggle to become financially independent.

But state funding of higher education through additional grants is where Saunder’s real focus lies. She compared budget statistics between 1999-2000 and 2011-2013 biennium budgets. In 2011, the state of Oregon allocated $100 million fewer dollars than in 1999. Further, this $100 million dollar was spread among 34,000 more students.

Also, Saunders reported that in 1999, 70 percent of higher education costs were funded by the state with students and their families making up the difference. In 2011, the ratios were inverted with students shouldering more than 70 percent of the cost of higher education.

“Sometimes we go forward with things just because they have momentum,” Saunders said. “I’d hate to see us start something we can’t fund for the long haul.”