A Look at Oregon’s Novel Solution to the Student Loan Crisis
Based on the recent business journal study in Portland, graduates from the Oregon State University had the highest mid-career earning potentials, as compared to the rest of the state’s college graduates. In fact, the average annual salary in entry level positions for a typical grad from the said university is $44,600 while those who are in their mid-career level earn as much as $86,000 annually.
Unfortunately, the median debt of an Oregon University grad is almost $25,000 at 6.8 percent interest per year, so the problem on student loans remains as a serious concern among students and families in the state.
Oregon’s Approach to the Issue on Student Loans
In July 2013, the Oregon legislature passed a bill that could significantly eliminate concerns on student debt and tuition costs for incoming college students who plan to attend one of Oregon’s 7 public universities. Both the state house and state senate in Oregon passed the legislation with unanimous support from bi-partisans, and the bill is expected to be signed this month by Governor John Kitzhaber.
According to the proposed program, the tuition will be free throughout the entire college years, so there is no need for students to take out loans. Instead, the plan requires graduates to pay 3 percent of their disposable salary for 24 years to pay for their higher education costs and to fund this program that can help future students. This program is referred to as “Pay It Forward, Pay It Back”, and it is intended to bypass typical private lenders who charge massive interest rates on loans.
Thus, students can attend college for free while they are still in school, and they only need to pay back their college expenses after they graduate. On the other hand, students who are not able to graduate must pay a smaller percentage of their salary, depending on the length of time they spent in college.
After several decades, the fund is expected to be self-supporting, yet an initial investment of at least $9 billion during the first 24 years is necessary to implement this plan. Experts agree that the program’s sliding-scale nature makes it a sensible and worthwhile project.
For instance, it saves students from becoming burdened from unmanageable debts because the payback rates are capped at 3 percent of a grad’s income. Furthermore, the amount that needs to be paid back depends on one’s income, so this does not lead to financial hardship among those who have a meager income.
Although critics believe that the program is quite unfair for charging people who earn more for their college costs, this notion is only short-sighted. After all, education is a significant investment, and it is only fair that people give back more if they gain the most from their studies without causing burdens to those who are financially underprivileged.
In addition, individuals who are underemployed, permanently disabled or unemployed are not required to pay off the cost of loans that they are not likely to afford. The bottom line is that each person only pays an amount according to their pay check, and nobody is expected to pay over 3 percent of their salary.
Pay It Forward, Pay It Back is particularly beneficial to low- and middle-income college grads. While critics suggest that the cost may become more expensive for a typical grad over time, these criticisms are only based on insufficient facile analysis, which set aside the depressing effects of loan interest and the long-term benefits of eliminating the problem on tuition costs.
Key Features and Benefits of the Borrowing Scheme
It is worth noting that this borrowing scheme in Oregon is not entirely new. Milton Friedman, a Nobel-Prize awardee economist and libertarian icon, proposed this program in 1955. Moreover, Yale University has already implemented this plan for their own students prior to the introduction of government-guaranteed loans.
As of the 2010-2011 academic year, there were approximately 21,000 freshmen in public state universities and colleges in Oregon who pay about $171 million in tuition costs. To move these students and other incoming college students into the program, the state would have to spend at least $9 billion for more than 24 years until there is a sufficient number of students who are paying into this program to cover the outlays.
However, the 2010 census data was not adjusted for some issues such as inflation. Researchers estimate that students would need to pay about $800 back into this system during the first year after they graduate. As their salary increases by $2,000 in the 20th year of their career, they are expected to pay off in full the total cost of their college education. What’s more, students are supposed to pay more or less, depending on the amount they earn from their job.
This idea has originated from the Economic Opportunity Institute, which is a nonpartisan and nonprofit group in Washington. Legislators in several states including New York, Pennsylvania, California, Vermont and Washington have expressed their interest in this concept, yet Oregon legislators have taken the initial action on it. According to John Burbank, the Institute’s executive director, the program may create an effective social insurance vehicle that will offer more students an access to college education.
Possible Concerns that May Arise
The plan seems rather fool-proof and offers more benefits than drawbacks to students and families in the state. However, some critics have expressed their opinions about this program. Dave Girouard, the chief executive of Palo Alto’s Upstart, claimed that this system may suffer due to some reasons.
He suggested that the plan might turn off most students with the highest earning potential since they would think that traditional interest rates are more preferable than allocating a portion of their future income for loan repayments. Girouard added that the last thing anyone would want is a program populated with individuals who have no intention of working as hard, or those who are biased about earning a meager income.
Nevertheless, more people agree that this proposed solution by Oregon is an innovative and bold move that prevents lending agencies and for-profit banks from the acts of exploring students loans for their own interests. The plan brings back funding to the students who pay for their college expenses in an interest-free deferred cost and state-run system based on their ability to pay off their debts in the future.
Do you think Oregon’s solution to student loan issues in the country will work completely? Should other states adopt this program, too? Please share your thoughts about this topic on the comment box below.