Pennsylvania Proposal for Interest Free Student Loans
August 16, 2013

National lawmakers managed to right the student loans ship a little with their recent legislation that backed down a rate increase on subsidized student loans from 6.8% to 3.86%. But the plan not only does nothing to address the larger looming student loan crisis but if the Treasury note rate the new legislation is pinned to rises (as it’s predicted to), newer borrowers may be harder hit in coming years! Thankfully, although Congress has dropped the veritable student loan crisis ball, several states are looking for solutions all their own.

We recently covered the proposed Oregon plan that would allow students to attend college tuition free and pay it back – or, as they call it, pay it forward – once they’ve graduated and are in the workforce. But now Pennsylvania has brainstormed up a state-level approach to help consumers in their state deal with oppressive student loan debt. Here’s the details on the PA plan, how it compares to Oregon’s proposal and available federal plans!

How Pennsylvania’s Student Loan Alternative Plan Would Work

Like Oregon, the Penn state is touting their student loan alternative as a Pay It Forward plan. The “Pay It Forward, Pay It Back” bill sponsored by Democratic state Senator Daylin Leach proposes that students agree to a contract with the commonwealth where they would draw from a state pool to pay their tuition fees. After graduation, students would pay back a percentage of their income (4% is the number being bandied about) until their tuition debt is paid but the amount would be interest free!

How the Pennsylvania Plan Compares to Oregon’s Proposal

Pennsylvania has one upped Oregon in that their plan would be much more beneficial to borrowers because it limits what they would pay back. The Oregon proposal would see plan participants paying back a percentage of their income (roughly 3%) for a specific number of years. The downside to this is that you could end up paying back far more than you borrowed and even far more than you would have under a traditional student loan borrowing arrangement.

How the Pennsylvania Plan Compares to Traditional Student Loans

The Commonwealth’s plan would be greatly favorable to PA student loan borrowers who currently carry the second highest average student loan balance in the country at nearly $30,000 (New Hampshire tops them at over $32,000 per student). With an interest free agreement, they would obviously come out ahead compared to even the lowest rates now offered on federal loans of 3.86%. This would also give borrowers the ability to get out of debt sooner and for far less.

Concerns with the Pennsylvania Plan

At a glance, the PA Pay It Forward, Pay It Back plan seems great, but we like to examine all angles here at Tuition.io. Here are some questions we have that will hopefully be addressed once the details of the proposed legislation are released:

#1 What If the Participant Is Unemployed? If the plan participant is chronically unemployed or underemployed and the 4% of pay would represent a financial hardship, will there be a mechanism to lower the percentage or defer for a time?

#2 What If the Participant Can’t or Won’t Work? If the plan participant becomes disabled and cannot work or perhaps chooses to become a stay-at-home parent, how would the state treat the zero income? Will there be a threshold after which the debt will be forgiven?

#3 What If the Participant Doesn’t Graduate? If the plan participant doesn’t complete school, are they on the hook for solely the amount of tuition they tapped or is there some sort of penalty for lack of completion?

#4 What If the Participant Move Out of Pennsylvania? What will the mechanism be for collecting from participants who leave the state and abandon their payments? Will collection costs and interest be tacked on for those that aren’t participating as promised?

#5 What Is the Criteria to Qualify? Will this plan be open only to rising high school graduates or will the plan be available for adults who were never able to finish their degrees? How long must you live in state to qualify? Is there a minimum GPA or test scores to qualify? If you don’t qualify initially, will there be opportunities to rehabilitate a GPA or residency stay in order to later qualify? 

#6 Will the Plan be Available for Other Educational Purposes? Will grad school students, law school students or doctoral candidates be able to use the fund to further their studies or will it be limited to four year university studies? What about tech and vocational school students? Can they use the plan as well?

#7 Will There Be Tax Consequences? Will the IRS assess as imputed income the benefit of being provided an interest free loan? In related party transactions involving loans there can be imputed interest that is assessed as income to one of the parties. Since the IRS searches for opportunities to assess taxes like a heat-seeking missile this can be a concern…

Final Thoughts

It is refreshing to see that at least two states are proactively addressing the concerns of college affordability, but as always there’s the disturbing fact that as good as these plans are, they don’t address the looming student loan crisis that worsens every day. With more educational debt going bad each day, we need some viable solutions. But since these problems weren’t created at a state level, they can’t be solved there. If Pennsylvania can get their Pay It Forward, Pay It Back funded and established, it could be great for up and coming college students in the state. We look forward to hearing more about it as details emerge and will keep you posted!

To help you keep a handle on your own student loans, try Tuition.io’s student loan management tool to track and optimize your debt. Also be sure to check our blog frequently for updates on payment strategies, pending legislation and lighter-hearted fare to distract you from your debt!