Has Oregon Solved the Student Loan Crisis?
July 15, 2013

Oregon is hard at work solving the issues of higher education affordability in their state and recently approved a piece of legislation like no other. HB 3472 Pay Forward, Pay Back was approved unanimously by both the Oregon state House and Senate. Interestingly, it was approved by their legislature the same day that federal student loan rates doubled because national lawmakers failed to act to prevent it. So we have to ask – with this bold new plan – has Oregon solved the student loan crisis?

How the Oregon Pay It Forward Plan Works

Oregon’s proposed plan intends to allow students to attend college tuition-free and debt-free but still contains a payment component. Essentially the plan would allow students to go to school at no cost on the contingency that they sign a contract pledging to pay to the State of Oregon or their institution a set percentage of their income for a set number of years. So far, the legislation orders a study to discuss the feasibility but doesn’t lay out percentages or the term of years. And they also haven’t discussed whether there is an option to opt out of the plan for those students whose families can afford to pay for school or for those who may prefer to pay for their school in other ways (including federal student loans). If this is a mandatory plan for all students, that would be a huge red flag!

Proposed Options for the Oregon Plan

The notion behind the plan is that when graduates who went to school under the plan pay in, the money goes into a fund that would then help finance the education of students that come behind them. But to get started, the fund needs seed money and it’s estimated that it will cost Oregon about $9 billion to get the plan up and running. Those students who attend school but don’t graduate would still have to pay in, but at a reduced rate and for a reduced number of years.

No matter how promising the plan sounds, it has critics. Bloomberg wrote a scathing criticism about the plan criticizing it for effectively charging higher tuition for better paying career degrees. But in fact, other countries routinely do the same thing. Is this, in fact, unfair? This brings us back around to whether students could opt out if they felt they would have better financial options under other payments plans.

Cost Estimate for Oregon Students

Because they haven’t laid out specific percentages yet, it’s hard to assess what the comparative impact would be for college students under the Oregon plan versus a traditional student loan plan. The Oregon Center for Public Policy estimates that a grad fresh out of college would pay around $800 per year (+/- $70 per month) which would then escalate to $2,000 by the 20th year of repayment (+/- $170 per month). The policy center estimates they would repay the cost of their education by year 20 and then the four years remaining would be a contribution to the fund to “pay it forward” to help pay for the education of future students.

Oregon Plan vs Student Loans

The percentage that’s being bandied about is 3% of adjusted gross income for 24 years. To hit the $800 per year, a student coming out of college would earn just $27,000. For starting salaries higher than that, the initial and subsequent payments would be higher. By way of comparison, average student loan debt of $27,000 at 6.8% interest under a 24 year plan cost $190 per month which would be higher across the entire repayment period than the Oregon plan.

But with this being based on salary, a comparison to a graduated repayment plan may be more helpful. But under a 20 year plan, the payments would range from $155 to a high of $308 which are still less favorable than the proposed plan – if it is enacted at 3%. What would be nice about a percentage payment that’s lower than IBR or PAYE is that it can allow grads to search for jobs in unconventional but promising routes such as unpaid internships. To equate the two plans at $190 per month, the Oregon graduate would need to be earning $76,000 per year. Any income higher than that makes the Pay It Forward Plan less advantageous.

Is the Oregon Plan Better?

At a glimpse, the Oregon plan sounds like it could be more affordable for students but a call for a study is just the first step into seeing a plan like this implemented. Certainly this will be interesting to follow to see if the feasibility study finds that the proposals are practical and can be implemented at costs that make higher education more affordable and accessible to students. Other legislative bodies that have expressed interest in the concept include Washington, New York, Vermont, Pennsylvania and California, though Oregon has been the only one to act in any way.

No matter what state you live in, no matter what amount of debts you have or what stage you are in your repayments, Tuition.io’s free student loan tool can help you manage your debt. Click here to learn more about Tuition.io and be sure to check out our blog for advice on how to deal with your student loans!