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:
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.