A Revolutionary Student Loan Proposal -- 3,000 Miles From D.C.

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J. Scott Applewhite, APCollege students wait on the steps of the House for a news conference on federal student loan rates, which doubled on July 1, 2013.
Last week, the Senate came up with a partial solution to the student debt crisis. Under their proposal, which would tie student loan interest to the Treasury bill rate, rates will slowly edge up to a maximum of 7 percent for undergrad loans, 9 percent for grad loans, and 9.7 percent for loans to parents. There will be no special provisions for subsidized Stafford loans to help middle class and lower-income students.

It's a new proposal for a very old problem: For years, politicians and pundits have grimly predicted the explosion of the student loan bubble. The economics are simple: as educations become more expensive and jobs pay less money, college students have become more deeply mired in debt. Unable to pay back their loans, these fresh-faced (and, later, not-so-fresh-faced) grads cannot buy homes, get new cars, or otherwise stimulate the economy. As the vicious cycle continues, the economy gets further dragged down, jobs become harder to get, debt becomes harder to service, and grads have even less money to spend.

The problem got worse on July 1, when interest rates on subsidized Stafford loans jumped from 3.4 to 6.8 percent, making it much harder for needy students to pay for their education. Rates on unsubsidized Stafford and PLUS loans held steady at 6.8 and 7.9 percent, respectively. The Senate's solution would eventually make loan rates rise even higher, putting students deeper in debt and making it even harder for low-income students to get college degrees.

Innovation at the State Level

At the heart of the student loan battle lies a basic contradiction. While most policymakers agree that education is vital to ensure America's place on the world stage, politicians on both sides of the aisle -- including President Obama -- have focused on proposals that will increase the student loan interest rate, saddling students with an ever-growing burden. Put another way, America's government realizes that a well-educated populace is in the national self-interest, but isn't willing to pay for it.

On the state level, things are a little more optimistic. In California, FixUC, a student-run group, has drawn a lot of attention with its innovative solution to the student debt problem. Rather than forcing students to borrow money to pay for their education, the FixUC proposal is that they agree to pay 5 percent of their post-graduation salary for 20 years. In practice, this would function much like the Pay As You Earn program, but FixUC proposes a revolutionary shift in the way that universities regard their students. Rather than forcing grads to go it alone own against a shifting job market, the plan would encourage colleges and universities to take an active part in ensuring the employability of their alumni.

FixUC may seem like pie-in-the-sky, but at least one state is seriously considering a similar plan. On July 1, the Oregon state legislature unanimously passed a bill that would create a "Pay It Forward" pilot program. In broad terms, Pay It Forward would allow Oregon high school graduates to attend a state university for free; in return, they would have to pay 3 percent of their postgraduation wages for the next 20 years. In the beginning, the program would be funded with state bonds; later, revenues from graduates would keep it going.

It remains to be seen if Pay It Forward will work, or even if it's feasible. If Oregon does manage to implement the program, however, it would be a game-changer. Not only would it offer a promising solution that could be implemented in other states, but it would also likely be a boon to Oregon's economy. As numerous studies have shown, state investment in higher education is incredibly profitable in the long run, both in reduced costs for social services and in increased tax revenue. If Oregon becomes a mecca for college students, it seems likely that the state's benefits would extend far into the future.

Bruce Watson is DailyFinance's Savings editor. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.


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41 Comments

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Sonny

How will these young people ever be able to afford lobster of caviar, like my generation? My first year college tuition at a major state university was only $115.00 for a full time student. Heck, I got out, started my own business and did great. I guess socialism isn't working, right?

July 17 2013 at 4:17 AM Report abuse rate up rate down Reply
setanta54s_back

prior to OPEN ADMISSIONS
absolutely NO ONE really gave a good damn
HOW the individual could or COULD NOT PAY TUITION for THEIR college educayshun.

July 17 2013 at 12:13 AM Report abuse -3 rate up rate down Reply
h.hughjardon

How about we look into why tuition costs have skyrocketed

July 16 2013 at 8:49 PM Report abuse rate up rate down Reply
1 reply to h.hughjardon's comment
setanta54s_back

the easier the money flows,the more THEY give themselves raises etc. so the costs go up.

July 17 2013 at 12:14 AM Report abuse rate up rate down Reply
rudyglassnmirror

what do you do when you cant pay your loan back .

July 16 2013 at 6:04 PM Report abuse rate up rate down Reply
1 reply to rudyglassnmirror's comment
h.hughjardon

It gets added to the national debt of course.

July 16 2013 at 8:50 PM Report abuse -2 rate up rate down Reply
toosmart4u

Ever notice the red states pay way less for education of their population. But they continue to vote republican, low wages, no benefits, cannot figure that one out. Nissan plant in Mississippi is hiring temporary workers to fil their factory. Now we know why they are building in the south. Those people have to wake up.

July 16 2013 at 5:29 PM Report abuse +5 rate up rate down Reply
1 reply to toosmart4u's comment
h.hughjardon

Lower cost of living. Buy a house in Manahattan or San Fransisco for the money you can one outside of Jackson.

then GFY.

July 16 2013 at 8:51 PM Report abuse +1 rate up rate down Reply
suealiaim

loans for higher education should be abolished.
you should not have to mortgage your future to get an education.
PERIOD.

July 16 2013 at 5:08 PM Report abuse +1 rate up rate down Reply
geraldlsolis

Do the math on this one... the college grad, IF he or she gets a job, and IF he or she makes $30,000 a year, at 3% a year, that would be $900 a year. IF the state can actually find and collect this paltry amount and IF the graduate actually works for 20 years, they will collect $18,000, plus some small amount for interest. So, can you go to an Oregon college for four years for $18,000? Lot of IFS to even begin to make this one workable.

July 16 2013 at 2:30 PM Report abuse +1 rate up rate down Reply
1 reply to geraldlsolis's comment
George Jr.

your logic is a little flawed. if someone is making 30,000 a year, they will get their 3% after taxes are taken out. so they would be collecting less then you mentioned. second, they wouldn't be collecting any interest. it's 3% over 20 years. at the end of 20 years you are done paying. so what ever 3% of your salary is over the 20 years is what you would pay back.

July 16 2013 at 2:40 PM Report abuse rate up rate down Reply
Mentallect

As long as GOP politicians are in control of the House, DC will not craft a student loan bill that's effective for students.

July 16 2013 at 2:19 PM Report abuse +1 rate up rate down Reply
Wendy

Post-script ... one more time, the States bear the burden of fixing federal intransigence. Glad to see the West Coast is taking the lead, and also glad I live in the "other Washington."

July 16 2013 at 2:17 PM Report abuse +1 rate up rate down Reply
Wendy

"Put another way, America's government realizes that a well-educated populace is in the national self-interest, but isn't willing to pay for it."

Is this country stupid? We are willing to subsidize corporate interests, and generously so, but unwilling to educate, clothe, feed, provide medical and dental care, and otherwise take care of the needs of our citizens.

Why should we, as taxpayers, keep subsidizing these "governors"? Put another way, what are we getting for OUR money?

July 16 2013 at 2:12 PM Report abuse +2 rate up rate down Reply
1 reply to Wendy's comment
MyThoughts

Wendy there will never be a well-educated populace most kids come out of school passing by the skin of their teeth.

July 16 2013 at 3:15 PM Report abuse +3 rate up rate down Reply
1 reply to MyThoughts's comment
suealiaim

there once was. and there could be again.

July 16 2013 at 5:12 PM Report abuse +1 rate up rate down