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Your Take: Oregon’s Attend College Now, Pay 3% for 25 Years Later

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College Fund/LoanIt’s no secret that students graduate with a ton of student loan debt. It was front in center at the beginning of the month when Congress failed to do anything to stop a huge increase in the interest rate on Stafford loans. I relied heavily on subsidized Stafford loans (and other loans) in order to attend Carnegie Mellon and the favorable interest rate made the loan’s outsized balance manageable. And I counted myself lucky as my loan was under $30,000.

Instead of paying tens of thousands of dollars up front for the cost of your tuition, what if you just paid a small percentage of your salary, say 3%, for the next twenty five years? That’s the proposal set forth by the state of Oregon. The Legislature approved a plan that would let students attend state colleges without paying tuition and instead the students would pay 3% of their income for 25 years.

What’s funny is that this is my friend Dave and I had discussed before in the past too, but from an investment perspective. There is also at least one focused on this – Upstart. The problem we identified from an investment perspective is that you might have a self-selection bias. People who have a future with high earnings may not want to commit to 25 years of 3% payments. Then again, when you select that early, and from such a large pool, there are so many factors that it’s almost impossible to determine why someone would opt for this plan.

As an Oregon resident, tuition is under $9,000 a year ($24,000 for non-resident). Let’s say there are no increases and you attend for four years, that’s a four year cost of $36,000. Assuming you start working immediately after college and that salary increases are offset by inflation (so that we can cheat and instead of calculating present value for the future cash flow, we just divide $36,000 by the 25 years and calculate the break-even point), you come out ahead if your salary is under $48,000. If your salary is above $48,000, you will have overpaid for your education.

As for Carnegie Mellon, resident tuition is a staggering $47,000 a year. Doing the same math, the breakeven point is a salary over $250,000. I would’ve definitely taken the 3% for 25 year deal.

I think it’s a novel idea and I’m impressed the Oregon Legislature even considered it, let alone passing it. We’ll see how it’s implemented but I like that they’re open to the idea and are willing to give it a try.

What do you think of the idea?

(Credit: derrickcollins)

{ 13 comments, please add your thoughts now! }

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13 Responses to “Your Take: Oregon’s Attend College Now, Pay 3% for 25 Years Later”

  1. Scott says:

    This could definitely be a huge incentive for career services departments to help place graduates in higher-paying jobs. It also helps make “sacrificial” jobs like Americorps more attractive, but then again there are other programs already in place to help make such jobs attractive.

  2. Texas Wahoo says:

    I think self-selection is likely to be a huge problem. I wouldn’t have taken that deal and I know most of my engineering class-mates would not have either. I’m guessing most of the people that take that option will be planning on taking low-paying jobs, etc.

    I also wonder what happens if you drop out after a year or two? Do you still pay the 3%?

    What if you go to grad/professional school? Would that be another X% or is this only for undergrads?

  3. My initial reaction is 25 years is a long time! Unless there were an option to pay a lump sum and get out of the commitment, I think I’d shy away from this opportunity. Though I agree–options are good.

    • MB says:

      I finished school when I was 25. I’d taken one semester off so had to start repaying my loans immediately, no grace period. I’ll be 43 this year. Guess what I’m still paying.

  4. At the very least, it’s an attempt at moving in the right direction. I would like it much more if it you would be able to repay in a ump sum. My other big concern is that it doesn’t cover housing which is often more expensive than tuition.

  5. I am just glad that they are talking about the issue. There are some glaring issues with the proposal, but this is just a test. How will they collect the tax from people outside of the state? Does it only affect in-state residents and what if they move when they graduate? There are many questions that can be asked, but at least they are making an attempt to figure out a solution.

  6. KnotReally says:

    Jobs for college grads are pretty low (i would say all time low but i have nothing to back it up) these days and they just passed a bill that banks on kids getting jobs?
    i like having options but this sounds like an idea that shouldnt have made it outside of the brainstorming session.

    Good luck keeping this one in the black

  7. Revanche says:

    I wouldn’t have done it because I worked my way through college and my state college tuition was pretty affordable, all things considered. I am making close to six figures now and would definitely resent paying that 3% over such a long period if I maintain a steady increase or even stay at this income level for the next 15-20 years. At this income, 3% for 15 years would cost me upwards of 40K. Definitely not commensurate with the cost of the actual education. Perhaps if the policy was accompanied by certain caps like: no more than X amount or percent above the sticker value of the education.

  8. ChrisCD says:

    It seems that the 3% for 25-years has some flaws, but a good step.

    Some easy mods would be 3% until paid off. That way higher earning jobs wouldn’t feel like they are over paying.

    If you drop out the amount owed would be prorated.

    There are of course some huge risks if people go unemployed for long periods.

  9. mcat says:

    Did you factor in the cost of borrowing that same amount and adding the amount of interest paid over the course of the loan as a comparison? Most folks won’t choose between paying in cash or pay 3%… they’ll choose paying with loans, or paying via the 3%?

  10. admiral58 says:

    Def a risk, but worth looking into, especially those who know they’ll be in low paying jobs in the public sector or maybe even teaching

  11. Martha says:

    This seems like it could be a great option for students who plan to be long-term grad students. That way you’ll have at least 5 years of <$30k salary out of your 25 year obligation!

  12. admiral58 says:

    Yea, if you’re going for your PHD and will be on campus for a long time and plan to work in the public sector, then do this plan. Why not

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