Saturday, July 13, 2013

A new way to approach student debt?

It looks like Oregon is on it's way to attempting to solve the student loan crisis in their state. But just how feasible is their solution? The basic concept of the plan is that you would not receive any traditional loans and you would not pay any tuition. You heard that right: no student loans. What you would do upon graduation is pay the University 3% of your income for 25 years. Essentially it would put everyone on an income based repayment plan that you currently get through federal loans.

I definitely agree with this program in principle, but I think it needs a few modifications for it to actually succeed. Let's look at a few examples of how much each person would be paying over the course of those 25 years:

30,000 Salary: $22,500
50,000 Salary: $37,500
75,000 Salary: $56,250
100,000 Salary: $75,000

As you can see, obviously the higher salaries would be "subsidizing" the the cost of lower paying degrees and you know what? I'm actually OK with that with a slight modification. If you are able to pay more than the 3% of your income, you should be be able to pre-pay your "loan" amount up to a certain max amount. Maybe something like the cost of tuition + $1,000 to cover any extra expenses? That would seem pretty fair to me.

You may also argue that students would not be motivated to pursue higher salary jobs because they would pay more back, but I think that is what the payback cap would be if you start to pre-pay your loan back instead. We also don't see the increase in taxes really stopping anyone from taking that $100,000 salary job compared to the $50,000 salary job.

If we use the example of Oregon State University, the cost to attend in 2013-14 in Tuition and fees is $8,538. So that means over the course of 4 years your total would be $34,512+$1,000. That means that everyone making over $50,000 a year would most likely want to pay more than the minimum. You would obviously have the choice of what to do, and for people making less they would still be able to use the IBR method to pay a lower total amount.

The only thing that it seems may be a problem is with the program itself, and how the funding will work. Australia already does a similar thing, so there must be some way to make this work! If we assume that there are about 4000 freshman entering Oregon State University each year the costs for the state would rise very quickly.

Year 1: 4000 Students * $8,538 = $34,152,000 Cost
Year 2: 8000 Students * $8,538 = $68,304,000
Year 3: 12,000 Students * $8,538 = $102,456,000
Year 4: 16,000 Students * $8,538 = $136,608,000

Total cost: $341,520,000

So the total cost at this one university before they even begin receiving a cent of income from the program would be around $341 million! I didn't even factor in people not completing their degree or dropping out - and what do you do to them? Still charge them 3% over 25 years or until they pay back how much they were "loaned"? Those are more rules and situations that Oregon would also have to account for.

The other side of the program, or the income assuming that the average student graduating with a bachelor's degree will make $40,000 a year.

$40,000 Salary * 4000 Students * 3% = $4,800,000 Income/Year

fast forward 4 years to when they are making the "full amount" each year...

$40,000 Salary * 16,000 Students * 3% = $19,200,000 Income/Year

and then 24 years later when they have the "maximum" amount of students paying...

$40,000 Salary * 96,000 Students * 3% = $115,200,000 Income/Year

So while the school would technically be able to break even on a per-student basis, it would probably take many years to actually generate a positive cash flow (if they even do?) and that is a huge, huge cost upfront. You also have to take into account students that become unemployed, or students that eventually leave the workforce to start a family. Obviously there would be a lot more complex calculations going into this, but I like the sound of this program at it's face value with a few tweaks. I'll leave the technicalities and funding to someone much more knowledgeable on the program than me!


  1. I love this program and it's going to really propel Oregon's economy ahead in the coming decades. I'm sure they'll be making some tweaks as the years go by. It's great they rolled it out without waiting to make it absolutely perfect since it would never happen.

    1. I agree...I hope they stick with it and find a way to make it work. I'm sure they have also done a much more advanced analysis of the actual program as well.

      When I saw how quickly the program actually came to be (I believe it was 1 year since it was proposed) I was amazed considering the pace that our national government works at...