With average student loan debts rapidly approaching $30,000 — more than three times what they were just 20 years ago — an increasing number of graduates are finding themselves stuck underneath an unconquerable mountain of debt. Student loan debts now weigh on more than two thirds of the nation’s graduating students. In light of what has been dubbed the student loan crisis, it’s becoming clear that the current college tuition model is unsustainable.
In 2012, a group of students from Portland State University presented their solution to the college tuition crisis to the Oregon state legislature: “Pay it Forward.” Pay it Forward (PIF) is a modified version of the graduate tax first proposed by the Chicago economist Milton Friedman. Instead of charging students a set amount of tuition, the plan would have public universities collect a percentage of their graduates’ income for a number of years following graduation. In Oregon, the solution— which now has a committee dedicated to considering the creation of a pilot program — would have recipients of bachelors degrees from state universities pay the state five percent of their income for 20 years after graduation. Importantly, PIF is a tax and not a debt, meaning that there is no way for graduates enrolled in the program to buy themselves out of it before their contract is up. In addition, PIF programs are often voluntary, meaning that incoming students would have a choice between paying standard tuition and enrolling in PIF.
The concept of PIF spread across the country after Oregon decided to evaluate the possibilities of implementation in 2013. Today, more than 20 states have created similar investigative committees. Pay it Forward’s surge in popularity is in part due to its bipartisan support. Conservative legislators in Oregon said they view the program as a student-government transaction, which they prefer to grants. Progressives, for the most part, are strongly in favor of the solution because of its ability to lower financial barriers to higher education, reduce overwhelming post-graduation debts and allow graduates more flexibility to choose low-paying career paths. Despite the overwhelmingly positive reaction to PIF from state governments and the news media alike, the program’s many drawbacks make it a flawed method of reforming student loan issues. In particular, PIF seems financially infeasible, creates a troublesome set of incentives for students and universities and maintains a negative, profit-oriented approach to education.
The process of launching PIF plans is a costly one. It presents universities with serious financial burdens and presumes a great deal of foresight into the financial future. Oregon’s investigation committee, for instance, estimates that the program would cost $9 billion dollars to start up, although some economists predict that the cost would actually be much higher. In light of these projections, it seems extremely unlikely that any state could independently cover the launch costs of PIF over the two-decade period it would take for the program to begin generating full income. As a solution, Oregon has proposed that the steep upfront cost could be paid using Wall Street bonds. However, it’s unlikely investors would agree to such a deal unless they could be guaranteed a significant profit. And if the PIF program failed to generate the predicted revenue, the state would be forced to significantly raise taxes, tuition or yearly income percentages in order to cover the difference. Instead of reducing student debt, PIF could end up simply repackaging it.
In addition, the collection of PIF funds would be tremendously complex, which would only add to the costs of the program. There is no existing mechanism in place for states to collect payments from graduates who move out of state or out of the country, and it would be very challenging for states to keep track of two decades worth of graduates at any given time. Furthermore, PIF assumes a very stable economic climate. Economic downturns could devastate university budgets as graduates are hit by pay cuts and layoffs. Since, under the current proposed plans, graduates would not be accountable for the difference in payments, the university would have to take out even more loans to cover its operating costs. These financial complexities make it unclear whether PIF is feasible or even desirable.
Pay it Forward plans also create a worrisome set of incentives for students and universities. Because the programs are voluntary, they would suffer from the problem of adverse selection. Students who plan on going into high-income fields, such as aspiring investment bankers or medical practitioners, would have a strong incentive to avoid the program and opt for traditional loans, which would cost them less in the long term. This is a major problem for the PIF model, as it relies on larger earners to balance out less profitable graduates. In response, some economists have proposed that student debt could be denominated in dollars rather than over time, such that a graduate could pay back their debt before the end of the twenty years and be debt free. Although this would move to solve the problem of adverse selection, it defeats the purpose of Pay it Forward: university payments are converted back from tax to debt, preventing the university from counting on the continuing payments from high earning graduates to balance the reduced income from lower earning graduates. When Yale implemented a similar program — admittedly, school-wide instead of statewide — in the 1970s, it was cancelled and declared a failure by administrators and participants alike before the turn of the century. Not a single class that enrolled in the plan managed to pay off their debt.
Pay it Forward might also incentivize universities to produce higher earning students in order to secure a larger budget. State funding to public universities is already lower than ever, and universities have raised tuition costs to make up for lagging state support. In theory, it might seem desirable for universities to seek to turn out more high-earning graduates since this would require the university to provide its students better professors, facilities and enhanced opportunities. In practice, however, it would likely mean that universities would strongly prefer students who plan on going into higher earning fields during admissions or steer their students towards such fields while in school. Public universities would re-orient towards professional education, making liberal arts education a privilege for those lucky and wealthy enough to attend private institutions.
This incentive to shift away from liberal arts education highlights the largest issue with PIF programs: they reinforce a profit-oriented approach to education and threaten to change the public perception of education as a public good. Public access to higher education is essential to the democratic system, which relies on a well-informed general population to engage in and evaluate debates over public policy and values. Thus, progressive reforms to the public higher education system ought to move towards making higher education a free public good — a possibility that’s more financially viable than it sounds. Instead, PIF only further entrenches the idea of individual financial responsibility for education, framing it as a commodity only valuable insofar as it provides a substantial return on investment.
If we are to value public universities as a place for critical thinking and discussions of social justice and responsibility — rather than a mere training-ground for private enterprise — it will be essential that education finance reforms work to separate higher education from the pressures of the market. In light of the massive student debt crisis, it is clear that our system for financing higher education is in dire need of reform. But, PIF initiatives are not the solution. Rather, they are superficial reforms that create a host of new financial problems while committing our public universities even further to the corporatization of education.
Art by Kwang Choi.
This article is part of BPR’s special feature on higher education. Please click here to return to the rest of the feature.