Under Oregon’s Pay It Forward, Pay It Back plan, students would pay no tuition at state universities – if they agree to pay the state 3 percent of their earnings for 24 years. It’s a gamble for students and taxpayers, say critics. Students who plan careers in medicine, law, business and engineering will do much better paying the tuition up front, leaving Pay It Forward for students who don’t anticipate earning very much.

# Free college! 24 years to pay!

July 16, 2013 by Joanne

Filed Under: College Tagged With: college costs, earnings, Oregon, Pay It Forward, student loans, tuition

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Last reply was 3 months ago

YES!!! I wish this were around when I was younger. I’m a housewife, and so three percent of zero dollars is a very affordable sum indeed.

Clearly, the proponents of this idea are products of the modern educational system: the math doesn’t work at all.

Suppose you graduate and immediately get a job that pays, over the next 24 years, an average of $100,000 per year. I think we can mostly agree that this represents a near best-case scenario.

You’re basically paying back $3,000 per year on a $72,000 loan at zero percent interest. $72,000 divided by four years (assuming you graduate in four years!) is $18,000 per year. This page:

http://oregonstate.edu/financialaid/cost-attendance

says that Oregon state – today, not three years from now – costs an estimated $23,658 per year to attend.

So, the state is proposing – best case – to pay three-fourths of your college costs at zero percent interest for 24 years and to write off the other $5,658 as a grant. That same $72,000 placed at three percent would earn about $29,000 in interest over 24 years.

The state is thus proposing to spend $22,000 right away and $29,000 over the next 24 years in the opportunity cost of the money on EVERY kid that gets into a state university. I don’t know how many kids Oregon has going into state universities, but at $50K a pop, the bill is going to be pretty steep.

Luckily, it’s mostly the citizens of the future who pay. Passing a whopping big bill down to future generations seems to be the default government plan these days.

Rob, it’s not fair to bring math into these debates. It’s about FEELINGS.

The Oregon legislature isn’t *quite* that stupid.

The initial proposal only covers “residents of this state” [Googl-ing for "Oregon HB 3472" will turn up the bill]. So these folks would (I expect) be paying in-state tuition. In-state tuition is $8,538/year. So … a bit less than $36K (assuming four years … this might be optimistic) that needs to be paid off in 20 years. After accounting for interest (and using today’s very low interest rates …) this maybe works out to about $72K to repay. Or ~$3.5K per year for 20 years (less in the early years, more in the later years). The median income for US college graduates (with a 4-year degree or more) age 25 or more is ~$49/year. 3% of that is almost $1,700. So things don’t work out if we account for interest.

If we figure that the $36K will be treated as an interest free loan, then the annual repayment needs to be $1,800 per year. So if we add an interest-free loan component to this, it almost works out for in-state tuition paying students.

Of course, *someone* has to pay the interest on the money borrowed to go to school *today*, so this winds up increasing the cost to the state.

And there will be some self-selection bias here, too. Folks planning on becoming engineers, accountants and doctors may well decide to just pay up front. So the pool of people in the 20-year 3% of salary repayment plan probably have a lower annual income than average. Which means that you aren’t getting $1,700/year per student back on average … you are maybe getting $1,400/year.

But, that $8,538/year is only tuition, not books, fees or housing. The $23,658 is the estimated WHOLE cost, form the web page referenced.

Ah … I didn’t read carefully and though you were using the out-of-state tuition+fees number.

If Oregon proposes giving kids ~100K over four years and thinks that this can be recouped with ~$1.7 – $3.5K per year for 20 years … yeah, the legislature is dreaming.