by Michael A. MacDowell
The federal government will continue to be dogged by questions about its commitment to those seeking a college education whether or not it acts to restore the student loan rate to 3.4 percent after inaction in Congress doubled it recently.
Since the mid-l960s, subsidized student loans have been one of the mainstays for financing a college education. The federal government has helped countless Americans obtain a college education, starting with the Morrill Act of 1862 that established various land-grant colleges, through the variations of the GI Bill that enabled millions of veterans go to college, to the Pell grants and Stafford loans of today. These have been and are good public policies. College graduates generally do better for themselves, for their families and their communities. They earn upwards of $1 million more over their lifetime than non-college graduates. They are more apt to participate as community volunteers and cast their ballots at election polls. Plus, they pay more taxes because they earn more money.
Simply put, college is a good investment.
Student loan debt has become a national issue in recent years. Last year, student debt surpassed credit card debt as the second largest category of outstanding loans next only to mortgages. Since aggregate student-loan debt has surpassed $1 trillion, it is understandable why Congress wants to find a long-term solution to this important issue.
One novel solution has been advanced in the Oregon legislature that bears some consideration. Oregon’s “Pay it Forward, Pay it Back” plan calls for the creation of a fund which students would draw from to pay for college. Students who participate in the program pay 2 percent of their annual income back into the special fund for 24 years following their anticipated graduation year.
The plan addresses a key issue plaguing student loans today. Repayment of student loans currently begins six months after graduation. There are two problems with the timing of the repayment plan: Graduates are expected to pay back their loans regardless of their employment circumstance and their repayment schedules are not based on earnings.
Most graduates can find a job, but in a sluggish economy it might take two years or more to find a job that launches a career and generates the kind of income that facilitates the repayment of loans. “Pay it Forward, Pay it Back” addresses the ability of graduates to repay loans by extending them over a longer period of time that also is more in tune with future earnings.
Families and students that take out loans to help pay for college are in essence investing in themselves. Just like any investment, a college education has a rate of return (ROI). That ROI grows as an individual’s income increases. To expect a young graduate to pay back loans at a point in their lives when they are earning much less than they will be in 10 or 15 years does not make sense. Oregon’s plan allows graduates to pay back money borrowed from the fund over a period of time when they will be earning more.
The plan also bases repayments on income. The more an individual earns the more they pay back into the fund. This progressive – income-based payment system – is similar to the one used for decades in the U.K. and in Australia. It works well there.
At this time, the Oregon plan would be limited to students attending state-owned universities. However, in states like Pennsylvania where there are many more private colleges and universities, the plan could be used by all institutions regardless of affiliations. It would make sense for all colleges and universities in the state to be covered by a fund similar to “Pay it Forward, Pay it Back” since private institutions in the commonwealth graduate more than 48 percent of all four-year students and 59 percent of all graduate students.
In Oregon, the state will borrow the initial money to fund the program. The process will initiate a revolving loan fund. The estimated $9 billion needed to start the fund would no doubt meet with the approval of the bond market because student loan debts are exempt from bankruptcy court declarations, hence the fund would pay investors an assured return. In addition, the fund will collect enough from graduates paying pack into it to continue to provide for new college-bound students in need.
Those who attend college, but do not graduate would still have to pay back into the fund. Their repayments, however, would be lower because their income might be as well. Today, students incur the same interest rate and – depending on the number of years they were in college – the same monthly payment whether they graduate or not.
Clearly, college students are making an investment in themselves and their country by obtaining a degree. It is essential that we find a fiscally sound way to support our next generation of leaders, innovators and entrepreneurs who must borrow to complete their college degrees. With modifications for Pennsylvania, the blueprint Oregon has provided makes plenty of sense.
Michael A. MacDowell served on Pennsylvania Gov. Tom Corbett’s Advisory Commission on Postsecondary Education. He is also a former economics professor and the retired president of Misericordia University in Dallas, Pa. He is a resident of Harveys Lake, Pa.