Give Me Back My Five Bucks

Would you want free tuition, in exchange for a percentage of income?

I read this interesting article yesterday about Oregon’s “Pay it Forward, Pay it Back” pilot tuition plan. Basically this means that students will be allowed to go to a public university or community college tuition-free, in exchange for a binding contract that they will pay a small, fixed percentage of their annual gross income for 20 years after they graduate.

In this financial model, there was a proposal that all community college students pay 1.5% of their income, while all four-year public university students pay 3% of their income – both for 20 years after graduation. The pilot program will likely choose one university and one community college to experiment with.

In theory, this is a pretty good plan. It lets students get an education without worrying about carrying a debt load after graduation. They can start their lives sooner, and not be bound by massive student loan payments every month.

But once I started to really think about this program and what it would mean financially, the more I realized how much I disliked the idea. Here’s why:

3% of your income over 20 years will likely be more than the degree would cost

Let’s say as a new graduate, you make $40,000 at your first job, and then your salary goes up from there so that 20 years later, you are making $90,000.

Your tuition for a 4-year degree from Portland State University will cost you $25,500 ($2,125 per quarter x 3 quarters/year = $6,375/year x 4 years). However, if you were to pay 3% over 20 years of your career, you would end up paying $35,700 – which is $10,200 more than what the degree is actually worth.

YEAR SALARY 3% OF SALARY YEAR SALARY 3% OF SALARY
Year 1 $40,000 $1,200 Year 11 $60,000 $1,800
Year 2 $40,000 $1,200 Year 12 $60,000 $1,800
Year 3 $45,000 $1,350 Year 13 $65,000 $1,950
Year 4 $45,000 $1,350 Year 14 $65,000 $1,950
Year 5 $45,000 $1,350 Year 15 $70,000 $2,100
Year 6 $50,000 $1,500 Year 16 $70,000 $2,100
Year 7 $50,000 $1,500 Year 17 $75,000 $2,250
Year 8 $55,000 $1,650 Year 18 $75,000 $2,250
Year 9 $55,000 $1,650 Year 19 $80,000 $2,400
Year 10 $55,000 $1,650 Year 20 $90,000 $2,700

You’re not allowed to pay it off earlier

A big problem I have is that you don’t get to decide when you pay off your loans. So if you start earning staggering amounts of money over your career (or if you really just hate the idea of owing money to somebody for that long), there’s no way to pay off the tuition you owe – you will be perpetually “in debt” for 20 years of your life with no way to get out of it. That sucks.

It’s still a student loan

A professor at PSU was quoted in the article as saying, “essentially what [the program] does is allows you not to carry a debt load. It’s not a debt you graduate with.”

Umm… debt is debt. Whether you owe $25,500 immediately after graduation, or $35,700 over 20 years, you still owe the money to somebody, and you’re still obligated to pay it. The Pay it Forward, Pay it Back program just prolongs the length in which a student needs to make payments for their education, without actually calling it what it is: a student loan.

Here are a few selected comments from the article:

tuition_comment1

tuition_comment3

tuition_comment2

As someone who had to work extremely hard to get $20,000 out of student debt, I can appreciate what they’re trying to do with this program. But, I would rather have higher payments and a higher interest rate if it means I can get rid of my debt in a few years, instead of a few decades. I want to decide where my money goes. I want to be debt-free on my own terms. And if I make more money in the future, I don’t want it going towards something I purchased in the past. But, that’s just me.

What are your thoughts on the Pay it Forward, Pay it Back program?

Author: Krystal Yee

I’m a personal finance blogger and marketing professional based in Vancouver. I’m a former Toronto Star (Moneyville) columnist, author of The Beginner’s Guide to Saving and Investing, and co-founder of the Canadian Personal Finance Conference. When I’m not working, you can usually find me running, climbing, playing field hockey, or plotting my next adventure.


Comments

  1. rockermocking says:

    For someone working in the non-profit field, where jobs can start as low as $25,000 a year in smaller cities, this plan is definitely worth it. Many non-profit jobs don’t have high salary growth potential either so even 20 years later, a person could still come out ahead.

    Also remember about inflation–the cost of tuition adjusted for inflation may end up being what a person pays over the 20 year period anyways, especially if they’re not in high paying field.

    • Amanda says:

      I was going to say more-or-less the same thing re: non-profits. I work in the non-profit field, and my general manager who’s been there for 10+ years only make $40,000/year. This would definitely work to our advantage!

  2. Michelle says:

    Sounds interesting, but I wouldn’t do it. The amount would most likely be much higher than what I would normally have to pay.

  3. deenadollars says:

    This creates a weird set of economic incentives — and I agree with the commenter that they haven’t thought it all through. But that’s typically what a pilot program is for, to see whether the way things should work in theory is they way they actually work in reality.

    This makes the cost of tuition relative for people depending on their expected future income, which is interesting. It does seem unlikely that someone who knew they were going to make a ton of money would choose to take this option, but people who are choosing fields that they know pay less, or fields that have uncertain outcomes, this might be an appealing, safe way to take those risks or do jobs that would otherwise go unfilled because of the low income potential.

    I think one thing that should be added is an informational component where, before signing the loan papers, students have to look at statistics about the average salaries of people from their chosen school in chosen careers at various stages. Many 18 year-olds have vague ideas about what careers are lucrative (heck, that’s why one of my majors was economics because it sounded practical at the time!), and this presents an opportunity to inform people. I am so sick of hearing twenty-somethings complain that they didn’t know what they were signing when they sign their loan papers; make the numbers clear, and I think everyone is better off.

    Finally, I hope Oregon thinks carefully about what they will do about people who do not finish the degree they start, since that is more common than actually finishing.

  4. Jordan says:

    This also leaves private college students high and dry – my ability to take out a student loan should not be dependent on what college I choose to attend.

  5. wongbenson says:

    That’s a tactic of moving money around (pay now or pay later), the core problem is schools are producing less value per student while raising prices. But I’d be on Krystal’s side and say just pay it now and don’t hand-cuff the next generation any further.

  6. Cassie says:

    It’s basically reversing the interest portion of a typical student loan. Instead of paying high interest costs on a loan balance up front, you pay a higher portion towards the end when you’re theoretically making more money.

    I wonder if the fixed percentage will vary between programs, or if they’ll start adjusting the tuition of certain programs to reflect the average income within that field?

    • Krystal Yee says:

      I think it would be hard to vary the fixed percentages, or adjust tuition, because many students end up working in a field that has nothing to do with their degree. It will be very interesting to see how the pilot program goes, but I wonder if it doesn’t work out, are the students who were in the pilot program stuck paying back their loans for 20 years? They won’t really know the full impact of the program until those students are 20 years into the work force.

  7. psychsarah says:

    I think to be fair, one should do the math on how much interest someone would pay if they just paid their minimum payments on their student loans. While this isn’t advisable from a financial perspective, I know a lot of people take this route. Perhaps they wouldn’t end up so differently.

    I think others have pointed out important flaws, like what happens if you don’t work, don’t finish a degree, or work for a while and then stop? Some people become disabled or choose to parent instead of working for income. How are these situations accounted for? I agree that it is still a loan, it just has a different structure. Their creativity is welcomed though, as the typical student loan route doesn’t work well for many.

    • Ice says:

      For a 6.8% loan of $25,500 with 0 down, you will pay $10,250 extra in interest if you take 12 years to pay off the loan in full. This requires making monthly payments of $250. For a $40k starting salary, the Pay It Forward Pay It Back is a good deal because it allows you to spread out 12 years of payments over 20 years. You must also factor in opportunity cost, since the payments you didn’t put towards a date loan payoff could go towards a down payment of a home, car, retirement savings, emergency fund, children, college savings account for children, stock market, etc.

      Also consider that interest on unsubsidized loans starts accruing when you receive the loan–freshman year, which increases interest.

      I will need more numbers supporting why Pay It Forward Pay It Back isn’t a good deal to be convinced.

  8. Jonathan P. Young says:

    • Two out of five student loan borrowers – or 41%- are delinquent at some point in the first five years after entering repayment.

  9. Nat says:

    I would strongly consider this option, because it guarantees that graduates will never have to pay more than they can afford on their debt – only a small, fixed percentage of their income. As for those making $$$ paying more for their schooling than those who have lower income post graduation, they are merely subsidizing the program for lower earners. Plus, if you’re making a ton of money, you are in an enviable position, so many graduates can’t get jobs at all after their studies!!

  10. Andrew says:

    This is really just a form of insurance. Choosing this option is insuring yourself against unemployment (or poor paying employment) post-graduation. While the average person may end up paying slightly more than someone simply paying back the traditional principal + interest, they never owe more than they can afford. Taking away some of the risk associated with student debt could very well lead to increased access to post secondary education.

  11. I could never do a program like this because I’d hate to think I was permanently linked to a program that I couldn’t get out of until 20 years after graduation. Plus depending on the amount of scholarships and grants you receive, going to a private school and taking out loans might actually be cheaper. I guess it’s a personal decision that each person has to make for him/herself. I wouldn’t personally do it, but some people might see it as a viable option.

  12. SLW says:

    I like this idea. I am paying 7.5% of my income to student loans. And I can’t save for retirement right now and I’m draining my savings account because my roommate moved out and I could not find a replacement yet (paying 2x the rent).

  13. amandaks says:

    Yikes, I’m all for governments looking at ways to reform our student debt situation but I would hate knowing that I owe tuition for a set 20 years.

    • Krystal Yee says:

      That’s my biggest problem with the program too – you’re stuck with it for 20 years, with no way to pay it off earlier.

  14. This program would be great if it were you pay 3% until you finish paying off your loan balance. This will guarantee the program from delinquent loans. But being tied to the program for 20 years! Hah! It would be better for you to get the military to pay for your school!

  15. Dirk says:

    After 30 years of work I would be happy to get a salary that´s higher than $30 000……but I´m in Germany,where everything is different! ;-) In this context here´s an interesting video: http://www.youtube.com/watch?feature=player_embedded&v=pS-E_SYld8g

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