Paying for higher education, the right way

Oregon lawmakers are facing a problem shared with the rest of the country: the constant, relentless, excessive increase in the cost of higher education. The tuition increases in the past few years have stretched the current system of financial aid, subsidized loans and scholarships to the breaking point, and it is both pricing students out of college and swallowing an ever increasing portion of public resources.

It is time for a change, that´s for sure - and the solution that Oregon has devised to make IMG_20121020_121400college affordable is really remarkable:

Oregon’s legislature is moving ahead with a plan to enable students to attend state schools with no money down. In return, under one proposal, the students would agree to pay into a special fund 3% of their salaries annually for 24 years.

The plan, called “Pay it Forward, Pay it Back,” would create a fund that students would draw from and eventually pay into—potentially bypassing traditional education lenders and the interest rates they charge. The state would likely borrow for the fund’s seed money, which could exceed $9 billion, but the program’s designers intend it to become self-sustaining.[...]

Under the Oregon plan, students who don’t graduate would still pay a fraction of their incomes into the fund; the amount would depend on how long they were in school.[...]

Using 2010 census data not adjusted for inflation, Mr. Gettel estimates students would pay an average of about $800 back into the program the first year after graduation. As their incomes grow, that would increase to about $2,000 in year 20, by which time they would have paid off the cost of their educations. Over the next four years they would contribute an additional $7,400, which constitutes the pay-it-forward aspect of the program—a sort of finance cost, Mr. Gettel said. Students would pay more or less depending on how much money they earned.

In a few words: no cost upfront, 3% of student earnings for the following 24 years.  Oregon is implementing a universal income-based repayment (IBR) system that is both financially sustainable and remarkably progressive.  It is, in fact, a much more fair and balanced than subsidizing college directly through general revenues; Matt Bruenig explains:

The problem with financing higher education in that way is that it is deeply unfair to those who do not attend college. Those who attend college come from disproportionately affluent backgrounds, and have disproportionately affluent futures. Funding college through general revenues therefore represents, at least in part, a transfer from the relatively poor people who do not attend college to the relatively rich people who do. (...)

A universal IBR system like the one Oregon is proposing does not have these fairness problems. Only those who attend college pay into the revolving fund that makes college tuition-free. The relatively poor set that never attends do not pay into the system at all.

Additionally, because a universal IBR system requires individuals to pay back a percentage of their income, it ensures that graduates that go on to more lucrative careers effectively subsidize graduates that do not. So, it is (in a sense) internally redistributive, which is a positive from an egalitarian perspective. Finally, because repayment is based on income, no one will find themselves overly burdened by the repayment obligation.

Some Federal student aid programs are based on IBR-like systems, certainty, but the Oregon scheme of making it truly universal is a step on the right direction. This is a sound, innovative way to pay for higher education that is working well in other countries; Connecticut should consider following Oregon´s lead in this field.

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