Paying It Forward: A Different Take on Income-Based Repayment

In prior blog posts, I have been less than charitable toward the federal government’s changes to the income-based repayment policies for student loans. (As a reminder, these changes provide large subsidies to students who attend expensive colleges and particularly those who earn good salaries after having attended law or medical school.) My criticism of the federal government’s way of implementing the program does not mean that I am not open to a better way of income-based repayment. With this in mind, I look at a proposal from the Economic Opportunity Institute, a liberal think tank from Washington State, which suggests an income-based repayment program for students attending that state’s public colleges and universities.

The EOI’s proposal, called “Pay It Forward,” would charge students no tuition or fees upfront and would require students to sign a contract stating that they would pay a certain percentage of their adjusted gross income per year (possibly one percent per year in college) for 25 years after leaving college. It appears that the state would rely on the IRS to enforce payment in order to capture part of the earnings of those who leave the state of Washington. This would be tricky to enforce in theory, given the IRS’s general reticence to step into state-level policies.

I am by no means convinced by the group’s crude simulations regarding the feasibility of the program. This is currently short on details and would also require a large one-time investment to get off the ground and enroll an initial cohort of students. Additionally, it is not clear whether the authors of the report accounted for part-time enrollment patterns in their cost estimates. I also urge caution with this program, as this sort of an income-based repayment program decouples the cost of attendance from what students actually pay. Colleges suddenly have a strong incentive to raise their posted tuition substantially in order to capture this additional revenue.

With all of these caveats, the Pay It Forward program does have the potential to serve as a simple income-based repayment program once analysts do more cost-effectiveness analyses. But this will only work if policymakers keep a close eye on the cost of college in order to result in a revenue-neutral program. My gut feeling is that the group’s estimates understate the cost of college under current rules and don’t consider the possibility of the incentives that will increase cost.

Author: Robert

I am an a professor at the University of Tennessee, Knoxville who studies higher education finance, accountability policies and practices, and student financial aid. All opinions expressed here are my own. View all posts by Robert