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

It’s no secret that students graduate with a ton of student loan debt [3]. 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 [4]. 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 [5] 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 [6] 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 [7])