No more debt!: The new plan to destroy tuition and loans A new system would get rid of college debt, by making some schools free -- with a novel way to pay it forward

If states are the laboratories of democracy, then what’s happening in Oregon's lab seems destined to become one of the most controversial higher education experiments of all. Championed by the local branch of the Working Families Party and called Pay It Forward, the plan that came out of Oregon's Legislature this year directs the state government to develop a program that allows students to attend the state’s public universities without paying tuition -- and without racking up tuition-associated debt. After an initial investment, Pay It Forward would then aim to finance itself by obligating participating students to send a set percent of their income back to Oregon for 24 years (3 percent of income for graduates of four-year colleges, and 1.5 percent for graduates of two-year schools).

As Oregon's Democratic U.S. Sen. Jeff Merkley now pushes to buttress the program with federal start-up money, and as other state legislatures look to follow Oregon, it is worth stating what should be an obvious truth: This proposal is hardly a perfect answer to the exploding college affordability crisis. Indeed, until we start making public college education as much of a right as public K-12 education -- that is, until we reject the tuition/user-fee model, finance higher education with broad-based tax revenues and make college free for students -- we aren't going to ever approach perfection.

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That said, America today unfortunately remains committed to treating higher education as a luxury rather than a necessity, meaning the tuition model is here to stay, at least for now. Pay It Forward, then, is a proposal to provide far broader access to higher education within that existing user-fee model. In other words, setting aside all the legitimate questions about specific financing formulas and logistical implementation, the concept at its core is a creative proposal to expand access to the current flawed system.

Most of the press surrounding Pay It Forward has depicted it as an innovative if controversial education financing model, which it certainly is. As In These Times' Sarah Jaffe put it, "Students won't have a fixed sum hanging over their head, gathering interest that’s being skimmed off by a for-profit lender or big bank." And because students are not paying that interest, many would find that 24 years of Pay It Forward payments end up being less in aggregate than paying back loans. In this, the program mimics parts of the federal government's more limited income-based repayment plans.

However, perhaps a better way to understand the initiative is to view it less as a financing scheme than as an education-themed riff off the basic idea of insurance and risk pooling. In Oregon’s Pay It Forward system, the risk being pooled would not be the risk of getting sick (health insurance) or dying prematurely (life insurance), but the risk of entering a weak job market and thus being unable to find a six-figure gig.

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Think about it: Health and life insurance systems garner a net premium-to-payout gain from people who are lucky enough to never get sick and who live into their 90s, respectively. Those gains cover the net premium-to-payout loss from people who get horribly sick or die prematurely. It’s the same concept for Pay It Forward. Its income-percentage payback system means the relatively few participants who are fortunate enough to become millionaires will end up contributing more into the system than the system spent on their education. Those gains will cover the net losses from those less fortunate graduates who cannot find high-paying jobs and who end up paying in less than was spent on their schooling. In short, just like health and life insurance pool the unpredictable variability of individuals' sickness and death, Pay It Forward pools the similarly unpredictable variability of individuals' post-graduate income.

For obvious reasons, this is an attractive idea -- so attractive, in fact, that there is now serious political momentum behind it. Not surprisingly, that has prompted critics to speak out.

Some of these critics make excellent points, such as those who attack the plan for only paying tuition but not other associated higher education costs. Those problems, however, are fairly straightforward resource issues that can (and should) be addressed with a modest public investment and serious college cost controls.

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The more troubling arguments against Pay It Forward are those that use ideology and speculation to defend the current debt-based system. These latter arguments were summarized in a recent Bloomberg article by Zac Bissonnette headlined "Oregon Tuition Plan Punishes Graduates' Success." The author first derides the program for "charg(ing) students with higher earnings potential more for their education, because they will contribute more over 25 years than everyone else." He then asserts that "motivated students wishing to major in engineering or finance will, quite rationally, opt for private colleges or out-of-state public colleges where they won’t have to subsidize liberal arts majors."

There are three problems with this line of criticism:

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1. It cites the alleged immorality of future possibilities (a comparatively few future rich folk having to pay more than their education was worth) to effectively defend the immorality of the current reality (many people forced to choose between taking on massive debt or being entirely priced out of the very higher education the economy increasingly requires). Not only does this argument effectively defend the unsustainable status quo, it also ignores what Pay It Forward actually is: an insurance-like system that pools the variability (read: risk) of graduates' back-end income in order to broaden access to education on the front end.

The morality of such pooling stems, in part, from income uncertainty. It isn't confiscating money already earned. It is instead stipulating that no student knows who will win and who will lose America's job-market lottery and, further, that there is a fundamental immorality in a debt-based higher education system that adds risk to that already risky lottery. And so its alternative financing system offers an up-front bargain that provides participants a stable, predictable way to avoid the worst qualities of that lottery.

2. The claim that it is wrong for those who make more money to end up paying more into the system reeks of the old me-first-screw-everybody-else ideology that has birthed the affordability crisis and created exactly the wrong education incentives. This ideology implies that college financing should be a largely individual endeavor, even though higher education is increasingly as much of a job prerequisite as a high school diploma.

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Because of the dominance of this ideology, higher education is financed by individual students who take on massive amounts of debt. And thanks to a weak job market and ever-higher tuition rates, much of that debt is unsustainable, creating default rates that are a systemic threat to the economy. Meanwhile, the debt disincentives built into the current system effectively discourage kids from higher education at the very moment the global economy is saying higher education is more necessary than ever. Pay It Forward recalibrates these destructive incentives.

3. The whole criticism of high-income majors having to "subsidize" low-income majors misunderstands how higher education actually works. More specifically, it wrongly assumes that most 18-year-olds entering college know exactly what their major and career path will be even though many do not.

Today, roughly 80 percent of college students change their major, and that's not necessarily a bad thing. After all, part of the value of college is the experience of academic exploration so that each individual student discovers what they are best at and most passionate about. The current debt-based system runs counter to that -- it actually encourages kids pursuing high-income fields to stay in those fields even if that's not the best use of their individual talents, and worse, even if that's not good for the national economy as a whole.

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That point about the national economy gets to the biggest potential economic and psychological upsides of Pay It Forward: how the system not only avoids punishing students who have trouble finding a high-paying job, but also frees more students to pursue their passions without having to sacrifice those passions on the altar of insurmountable debt. It could also financially liberate those kids to pursue careers in less-well-paying industries. And, yes, all of that could help revitalize the American economy.

As government data illustrate, our economy has been replacing industries that produce assets of tangible value with paper-pushing industries that prey on assets and produce little tangible value. This, to say the least, is not good for the country in the long term, and career decision-making plays a role in the trend.

Today, with value-destroying industries like speculative finance offering far higher pay than value-creating industries like manufacturing, our "best and brightest" graduates already have a big built-in incentive -- aka the desire to make good money -- to choose careers in those value-destroying industries. Huge college debt, though, turns those natural incentives into desperate necessities. That's because many graduates feel, regardless of what they may actually want to do with their lives, they must try to get a job in the highest-paying fields just because those are the jobs that appear to give them the most reasonable chance to pay off their student loans. The result is a brain drain from asset-creating industries and into asset-destroying industries.

In his must-read 2011 Harper's article titled "Infinite Debt," author Thomas Geoghegan reviews the societal effects of such a brain drain through the prism of American manufacturing:

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The lunkheads ended up running the (domestic) auto industry because the smart people, the Harvard dropouts and the autodidacts from Texas Tech, decided that the real money wasn’t in starting software companies or running telcos but in derivatives. We set up the incentives to keep our best and brightest out of Detroit. In June 2008, even in a bad year for Wall Street, 39 percent of the Harvard graduating class went directly into consulting or the ﬁnancial sector, and many others will go a few years later, after graduate school. The percentages are probably the same or worse for Princeton, Yale, and other elite schools. Of course, there are lunkheads in this group, too, but it shows where in general the talent’s going.

No doubt, students' calculations about paying back education debt plays at least some part in the career trends Geoghegan describes. And debt's impact on career choices is inevitably even more severe for many graduates of public colleges. That's because endowments help many students at elite private schools graduate with less debt than students at public universities.

The Pay It Forward model combats this insidious dynamic. By eliminating the prospect of a set amount of debt and basing repayment on a flat percentage of income -- whatever that income happens to be -- it lets participants view financial remuneration as one of many career considerations. Sure, human nature means compensation will still be a big factor in career choices, but with students facing far less debt, it may not have to be the only factor.

The most obvious macroeconomic benefit of that shift is its potential to boost labor force productivity. Simply put, people tend to be more economically productive and innovative when they are in jobs they love. Remove debt considerations from career decisions, and it stands to reason that more graduates will feel freer to pursue the jobs they love. It also stands to reason that at least some students will forsake Gordon Gekko-style careers in parasitic industries and instead feel liberated to either choose lower-paying asset building industries (manufacturing) or more public-oriented jobs (teaching, nonprofit work, social work, etc.).

Less obvious but just as significant to macroeconomic growth is how the same shift could help foster the kind of entrepreneurial risk taking that is so critical to a dynamic economy. After all, as the Wall Street Journal article recently documented, the current debt-based system is deterring that risk taking. Headlined "Student-Loan Load Kills Startup Dreams," the piece noted:

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Having the student-loan debt "is preventing me from being able to take a lot of chances or risks that are usually necessary when starting a business," Ms. Carney says... Some academic experts say leftover loans are the biggest impediment to upstart entrepreneurship by those who recently received college or graduate degrees. "I mentor students all the time," says Vivek Wadhwa, a fellow at Stanford University Law School. "The single largest inhibitor to entrepreneurship is the student loans." Recent graduates and college dropouts account for a disproportionate share of the founders of technology startups that have transformed the economy over the past decade, says Shikhar Ghosh, a senior lecturer at Harvard Business School. Many freshly-minted M.B.A.s "are willing to sleep on a couch for a year or two, but they can't do it with the burden of student loans," he adds.

Pay It Forward, by contrast, could create the financial space for such entrepreneurialism. By basing payment plans on a share of income (however small) rather than on a total amount, graduates could take more business risks without fear of defaulting on loans. That means more entrepreneurialism and potentially fewer defaults -- the latter of which are, again, now threatening the country's economy.

Finally, the Pay It Forward concept potentially combats the deleterious effect student debt has on the demand side of the economy. As the New York Times recently reported, that debt is "delaying purchases of things like homes, cars and other big-ticket items and acting as a drag on growth." Basically, students are having to devote more and more of their income to debt repayment instead of to the kind of consumer spending that stimulates the economy. By eliminating that debt, Pay It Forward allows students (or parents) to use whatever savings they have accrued for college instead on the kind of purchases that boost the economy (a home, a car, etc.) and epitomize the middle-class American dream.

That dream, of course, is ultimately what this is all about. As Oregon's Working Families Party says, Pay It Forward aims to "restore the next generation’s ability to enter the middle class upon graduation." The fundamental question it poses, then, is whether or not that's something America really wants?

Do we see some inherent social value in using debt to discourage young people from pursuing their passions, to deter them from choosing asset-building careers and to prevent them from reaching middle-class status? Or do we see a social value in encouraging graduates' passions, incentivizing asset-building careers and assisting middle-class dreams? Pay It Forward says the latter. Sure, it is not a perfect means of realizing that goal, but the concept at least seems to represent the possibility of serious progress.