Private Lenders Could “Pay-It-Forward” in Oregon

By Everet Rummel

The Oregon Higher Education Coordinating Commission is proposing a pilot program called “Pay-It-Forward.” Oregon residents could attend an in-state public university or community college tuition-free in exchange for paying a portion of their income annually for 20 years after graduation. The program, set to cover 1,000 students, is projected to cost the state between $5 million and $20 million per year for the next 20 years before becoming self-sustaining.

Proponents of “Pay-It-Forward” want to alleviate the problem of overwhelming student debt loads and make a college education more affordable. But should taxpayers cover students’ tuition when they are already directly funding public universities and student aid programs? Instead of microscopic pilot programs that throw more public money at the problem of rapidly rising tuition, there is a potential private solution to help finance higher education.

Milton Friedman originally proposed the concept of human capital contracts (HCCs) for the purpose of financing higher education. HCCs are privately funded financial instruments through which students receive funding for their tuition. In exchange, they pledge to pay a set percentage of their income annually for a set period of time after graduation. If they are ever unemployed or unable to pay, then they pay nothing until they have an income. If the payback period ends before the student has paid back the entirety of the sum loaned, the rest of the debt is forgiven. HCCs would go far beyond publicly funded “Pay-It-Forward”-type programs and traditional student loans by incentivizing informed educational decisions, forcing institutions to compete by controlling costs, and transferring financial risk to those who are better able to bear it.

HCC rates, the percentage of income that students must pay annually, and funds loaned would vary by the school attended, program of study, and academic achievement. Students attending schools and programs whose graduates tend to do poorly in the labor market would face lower rates but fewer funds. Students with lower academic achievement may have access to less funding. Those attending more expensive schools would receive more funds and higher rates only if their expected earnings are high relative to the costs of the education. Thus, rates and funds would incentivize students to seek more bang for their buck. Institutions, no longer reliant on seemingly unlimited government (taxpayer-funded) aid, would have to rein in costs and focus on improving academic quality. In sum, the availability of HCCs alone would tell consumers a lot about the economic value of various degree programs.

Most importantly, risk and financial burden would be borne by borrowers and lenders, not the state and taxpayers. The majority of the risk would be transferred to lenders, who are in a better position than student borrowers to bear it. Meanwhile, students would be free to pursue their chosen career paths without worrying about fixed monthly payments that could ruin their future financial prospects. The risk of default would be arguably lower than what we face now. These points should be remembered as policymakers in Oregon and across the country consider the crisis of higher education debt. Perhaps the market―not the government―has  solutions. Human capital contracts may be one of them.


Everet Rummel is a research associate at Cascade Policy Institute, Oregon’s free market public policy research organization.

“Pay-It-Forward” Is a Step Back

By Joel Grey

The Oregon Higher Education Coordinating Commission is considering a proposal called “Pay-It-Forward.” This pilot program would give free tuition at a state university to one thousand high school graduates each year, beginning in 2016. In exchange for free tuition, students would cede 3-5% of their paychecks over a twenty-year period. Although the program is intended to become self-sustaining, it would cost between $6.5 and $20 million each year for the first twenty years until that happened.

This is an example of a government proposal that is not well thought out. Yale tried a similar experiment in the 1970s and eventually forgave much of the debt years later. Many students overpaid for their education, while 20% defaulted. Oregon shouldn’t repeat Yale’s mistake.

Furthermore, having a third-party payer for college reduces students’ incentive to decide whether to attend college or to pursue other options, like technical schools. It also makes students less sensitive to the prices of institutions, likely increasing the cost of college over the long run.

Education should be an investment, but students and their families should invest and then reap the benefits. That way, talented students can succeed based on merit, rather than government funding students at great cost to taxpayers, with no guarantee a pilot program like “Pay-It-Forward” will work as intended.

Government simply can’t make decisions as well as the individuals who are affected by those decisions.

Joel Grey is a research associate at Cascade Policy Institute, Oregon’s free market public policy research organization.