QUESTIONS ABOUT PAY IT FORWARD
Pay It Forward has generated a lot of excitement across the country as a way to help address pressing problems in higher education prices and student debt. As interest in the proposal has grown, especially since Oregon’s state legislature unanimously passed a bill that could potentially lead to a pilot project, so have the questions. This document addresses some basic questions and concerns that have been raised about the Pay It Forward.
BASIC QUESTIONS AND CONCERNS
What is Pay It Forward?
Pay It Forward allows students at public community colleges and universities to attend without paying tuition and fees up front. Instead of finding the money or taking out loans, they would pay a certain fixed percentage of their income after school over a set period of time into a higher education trust fund. These contributions are then paid forward to fund future cohorts. PIF can be thought of as a social insurance program, since students receive the benefits up front and pay them back over time. It is an obligation and not a debt: it helps promote access to higher education while not destroying the lives of the unemployed and underemployed struggling to pay off student loans.
How does Pay It Forward help students?
Pay It Forward removes upfront tuition, one of the largest barriers of entry for higher education and causes of escalating student debt. Since students in Pay It Forward only pay for tuition after attending school, those from families with more modest incomes are not at a relative disadvantage in ability to pay.
By linking payments to income, Pay It Forward ensures that students can afford their payments. Unlike the current system, Pay It Forward participants with lower incomes or uncertain job prospects do not risk default on loans they cannot afford to repay. Because the program is not a ‘debt’ or a ‘loan’ participates are not accumulating debt or risking their credit record.
What problems does it address?
Pay It Forward addresses the linked problems of state disinvestment in higher education, ever-rising tuition, and exploding student debt. Students, especially those from modest backgrounds, often have to choose between taking out massive loans and missing out on the long-term
benefits of higher education. Since student loan repayments are generally not linked to what people actually earn, those in lower-paying jobs or having problems finding work at all accumulate debt and risk default, the repercussions of which can follow them for a lifetime. Could Pay It Forward lead to further state disinvestment in higher education?
Some critics have charged that Pay It Forward could be a sort of ‘Trojan horse’ giving states a further excuse to continue cutting higher education funding. Although critics have not explained why Pay It Forward would make trends any worse than they are now, it is true that the proposal is not designed in itself to solve them. It is a specific response to one element of the higher education cost crisis, not a complete solution.
Those working on Pay It Forward are addressing this issue, looking at ways to incentivize and recommend maintenance of effort, whether through federal incentives, a bonding measure, or complementary revenue policies.
WHAT STUDENTS PAY
How much would participants pay?
The answer to this question depends on specific proposals based on needs specific to any given state. As proposed in Oregon, payments would be between 1.5% and 3% paid out over twenty to twenty-four years. The Economic Opportunity Institute proposes that, over a twenty year period, students attending community college would pay 0.75% per year of their adjusted gross income while students attending university would pay 1%.
Will students pay more or less under Pay It Forward than they do currently?
Because Pay It Forward payments are linked to income, those that end up having relatively higher incomes over time may pay more into the system than they would have using traditional loans. The actual ‘break even’ point would depend on the repayment percentage and period length, but the vast majority of program participants would pay less or have very modest additional costs.
Of course, the relative cost depends on other factors in well. Some critical accounts claiming that most students will pay more under Pay It Forward are based on the basic ten-year repayment option. But for people who the current system forces to defer loan payments, refinance into longer-term payment options, or even miss payments and risk default, the long-term costs of Pay It Forward are significantly more attractive.
How Would Pay It Forward affect existing student aid programs?
PIF is intended to work with existing state- and federal-level grant programs and aid for lower-income students. It is not intended to replace them.
Some critics of Pay It Forward have claimed that the program would simply replace existing programs for lower-income students and lead to a net decrease in aid for those previously receiving grants. While this is not what those actually working on the Pay It Forward model are proposing, this argument only holds water to the extent that such programs are actually meeting student needs. The reality is that in many states these programs are increasingly unable to meet student needs: in Oregon, for instance, the existing need-based grant is capped at $2,000 and is only accessible to 20 percent of eligible students.
Why does Pay It Forward only cover tuition?
Tuition and fees are obviously not the only costs associated with college, but nationally they account for 39% of the budget for in-state students living on campus. Removing them from the equation makes overall costs much more manageable.
In Oregon, those studying the policy have decided that due to the wide variability in living expenses, focusing on more set costs like tuition and fees made more sense. PIF could be structured to include living expenses with the tradeoff being a higher share of income or longer pay-off period.
How will student program fees be affected?
There is no reason given why student fees would no longer go to student programs under a PIF model.
INCENTIVES FOR STUDENTS AND SCHOOLS
Could students avoid payment by not graduating?
No. In Oregon, the percentage is based on the number of years attended, so a student attending community college for 2 years would pay 1.5% and one attending a four-year school would pay 3%. Payments could also be based on the number of credits, for example. How will payments be collected? What happens when someone moves out of state?
This is a central issue for making Pay It Forward work, and is being addressed and studied by those developing concrete proposals. The most straightforward approach would be to have Pay It Forward payments come directly out of paychecks, much like Social Security payroll taxes. Partnering with the Federal Internal Revenue Service and the Department of Education may be the most effective way to track former students over time and across states.
What if participating students only take lower-income jobs after finishing school?
One of the intended benefits of Pay It Forward is that it allows participants the freedom to choose careers based on the needs of society rather than the imperatives of debt. This includes
careers in teaching, healthcare, and social services, and locations in rural and other underserved communities.
However, some have argued this is a ‘bug’ and not a feature of the program. This is a concern about “adverse selection,” a concern that students opting into the program will be those most likely to eventually take lower-income jobs. The consequence of this would be that long-term funding may not be sufficient to cover program costs. While to an extent this is a valid issue, it is overstated for a number of reasons, and those working on Pay It Forward are estimating and incorporating these effects into final proposals.
More generally, as Pay It Forward moves forward, the contributions of those with more established careers will help stabilize the overall pool, with new graduates paying less less starting out. It is unlikely that many students would choose to earn less to avoid paying the small percentage of income discussed in Pay It Forward proposals. Graduates choose jobs based on a number of factors. The reality is 88 percent of the U.S. population makes less than $75,000 a year. Pay It Forward is structured to be self-sustaining without needing to rely on the few who make millions of dollars annually.
What will happen to college funding if recent graduates lack jobs?
The Pay It Forward model uses a trust fund that provides the up front costs to universities. Program participants are not paying money to the institution directly but to the fund overall. This means that the short-term economic circumstances of individuals will not harm short-term university funding streams.
Could colleges start pushing students into higher-paying majors?
The existing system incentivizes colleges to recruit students from families with higher incomes, as recent articles on schools moving from based to merit-based aid or weakening need-blind admissions policies illustrate. Pay It Forward can be structured so that it is sustainable at moderate levels of income, so we should not exaggerate the likelihood that colleges will be impelled to channel students into only high-income occupations any more than they do so presently.
IMPLEMENTING PAY IT FORWARD
How far along is the Pay It Forward concept?
There has been a fair bit of confusion about how far along Pay It Forward actually is. When Oregon’s state legislature unanimously passed a bill in the summer of 2013, it did not approve a finalized program: the bill instructed a commission to study the feasibility of a pilot project to be presented in 2015. As of October 2013 that committee has been formed and is working out pilot program details.
Legislation has been proposed and drafted by legislators in seven other states (Maryland, Massachusetts, New Jersey, Ohio, Pennsylvania, Vermont, and Washington), and policymakers, students, and politicians have expressed interest elsewhere. At the Federal level, Oregon Senator Jeff Merkley has proposed legislation to provide federal funds to help establish state pilot projects.
How will the program be funded at startup?
While Pay It Forward is designed to be sustainable over time, initial reserves need to be established in its early years as participants would still be in school or just starting their careers. One potential way to raise this money would be for a state to issue bonds. Oregon’s proposal involves using state bonding to create a trust fund for initial start up costs. The bonds could potentially be sold to individuals, not simply to financial institutions, using the incentive of supporting college students.
The trust fund can also generate income through the spread between interest paid to bondholders and that earned through investments. Of course, specific funding mechanisms have to account for the fiscal realities in individual states. What works in one state may not work elsewhere.
Who would be eligible to participate?
Most Pay It Forward proposals, such as the one in Oregon, have intended it to focus on community college and university students in public schools, although some people are looking other program areas such as medical training. Initial pilot projects will likely only serve certain schools and accommodate a limited number of slots available to interested students.
How would a pilot project be structured?
Since a large-scale initial rollout of Pay It Forward is unlikely, the program will first be implemented as a smaller pilot project intended to model how the overall program would work. This means that careful design is very important. One issue is how to choose participants: pilots could involve providing a certain number of slots across institutions, individual campuses, selected populations, or high school graduating classes. Pilots would also likely be voluntary, with only interested students applying. As noted above, “adverse selection” is a potential issue, so the selection of individual student participants may rest on a number of other factors.