Oregon’s Plan To Set Up A College Tuition Ponzi Scheme

A lot of ink has been spilled in covering the latest cockamamie idea coming out of Oregon; the so-called ‘Pay it forward, Pay it back’ college tuition scheme. What’s striking is that the state legislature and one US Senator are giving serious consideration to what amounts to a Social Security style Ponzi Scheme – a massive redistribution plan that is doomed to fail.  This is all in an effort to create a utopian pipe dream that would magically erase the terms ‘debt’ and ‘tuition’ from our lexicon when discussing higher education.

Here’s how it would work, according to one of the bill’s chief supporters:

The way it works is that the student receives the benefit of higher education at the beginning of her adult life and pays a small fixed portion of her income into a system that will fund the education of future students for a fixed number of years. OCPP’s analysis shows that Pay It Forward can pay for itself in the long run.

If after completing her education, each student were to pay 3 percent of her annual income into the Pay It Forward fund for 24 years, it would, on average, be more than enough to cover the cost of her education. It would also contribute an additional $7,400 into the fund to help pay for the cost of educating subsequent students.

Matt Miller writes at the Foundation for Economic Freedom that the idea is rife with problems:

At no point will anyone bother to examine and compare the amount that was spent on a particular student and the amount that they repaid. If, after 24 years, you have only paid half of the amount that was originally “loaned out” to you, don’t worry about it, you’re off the hook anyway. If, after 24 years, you’ve paid double the amount that was originally “loaned out” to you, don’t expect a refund for the difference, either …

Under such a system, the costs of a service are not even remotely connected to what someone pays for the service. Such a scheme incentivizes all sorts of waste and irresponsible behavior. According to The Wall Street Journal, “The program’s designers intend it to become self-sustaining,” with the money paid back by graduates going into a trust fund in order to finance the next year’s crop of students (similar to how Social Security is theoretically supposed to sustain itself).

Much in the same manner in which Obamacare creates more distance between the consumer and the product, this system would virtually eliminate free market pressures (the Invisible Hand described by Adam Smith) that would drive down costs. This would have the opposite effect intended – it would lead  to even higher costs. Moreover, many observers have pointed out that this system would give a disproportionate incentive to those with higher earning potential to opt out of the system altogether, as they would pay far more over the life of the repyament plan than the original cost of their education. For instance, in a guest post at National Review, Alex Holt points out,

… high income graduates must pay more to offset the low payments from graduates earning little income. While that seems obvious, few people realize that also means high income graduates would probably have to pay more than they would under existing student loan options. That creates an incentive for students undertaking high value degrees, like computer science majors, to opt out of a program like ‘Pay It Forward’, and to go the traditional loan route. Oregon is then stuck funding low-return educational investments and is unable to recoup the costs of the program. And forget about the state charging different degree seekers different rates in order to avoid adverse selection. The political backlash that will occur once Oregonians realize social workers and teachers have to pay 10 percent of their incomes while engineers pay 2 percent will likely sink the program.

Holt then thrusts a dagger in the heart of the plan that is intended to eliminate debt altogether from the system of higher education, saying, “And that is the irony in the Oregon plan – it doesn’t eliminate debt. Someone still has to borrow if Oregon wants to pay university faculty today with some future stream of payments, it just happens to be the state.” [emphasis added]

Yes, that’s right. The state would have to borrow the money upfront to seed the project. How much? Around $9 billion – which the state would have to pay back, of course. The authors of the original white paper underlying this idea told the New York Times, “there would be some substantial upfront transition costs, which, for universal adoption in Oregon, are estimated at $9 billion. 25 years from now, it will be self-financing. The question is, ‘How do we get there?’”

The idea has prominent liberal champions, including several Portland-area state legislators. Recently, the ultra-liberal US Senator, Jeff Merkley (D-OR) has thrown his support behind the plan, and proposes to expand it nationally: “The hubbub started in July when the Legislature passed House Bill 3472 asking the state’s Higher Education Coordinating Commission to report to the 2015 Legislature on the feasibility of a pilot program and how it could be established. Sen. Jeff Merkley, D-Ore., wants to provide funding for five-year pilot programs here and around the country by setting aside some of the money from student loan programs.”

Once again, in an attempt to gain any sort of foothold of relevance ahead of his reelection bid in 2014, we see Jeff Merkley embracing the most unrealistic, pie in the sky liberal idea that might possibly make him appear to be a champion of the little guy. 

In a time when federal and state budgets are stretched beyond their breaking points, it seems foolhardy to propose to set aside such a massive chunk of public funds for a program that is bound for failure. This idea would be laughed out of most state legislatures. Unfortunately, Oregon is giving it a forum for serious consideration.

Follow Jeff on Twitter @ChargerJeff.