When a Student Debt Fix Makes a Bigger Mess

If the road to hell is paved with good intentions, the Oregon Legislative Assembly put the pedal to the metal when it approved House Bill 3472.

The legislation proposes to address the student debt problem by offering state residents a free ride at participating higher education institutions for as long as they remain in school. Thereafter, the free part disappears as graduates begin to repay the cost of their schooling by way of a percentage of their adjusted gross earnings in the years ahead.

Of course, the devil is in the details. Maximum student loan values, percentages of gross earnings, repayment durations and interest rates still need to be hashed out, but fundamentally speaking, this is how human capital contracts work: investors (Oregonian taxpayers, in this instance) roll the dice on the economic potentials of the people whose educational pursuits they choose to finance in this manner.

A Student Debt Solution or Another Problem?

But is the Pay Forward – Pay Back program, as it’s called, the game changer its sponsors intended, or is it just another deferred payment plan that disconnects consumers from the longer-term consequences of their present-day financial decisions? Perhaps it should be renamed the Pay Me Now or Pay Me More Later program because of the compounding effect of the unpaid interest. That is, unless the assembly has in mind for the taxpayers to cover the tab while the kids are in school.

Even more disappointing, however, is Oregon’s feeble attempt at tackling the root cause of the problem — endlessly escalating tuition prices — by merely committing to “…conduct a study on whether public universities listed in ORS 352.002 can successfully implement a tuition freeze that will guarantee that incoming undergraduate students have the same tuition rate for four years.” In fact the preamble to 3472 implies that rising costs are so baked into our cultural cake, the only thing that makes sense to do is eat it.

The only aspect of this legislation that deserves thoughtful consideration and civil debate is the longer loan repayment term. With student loans often the size of small mortgages, this is an important flexibility to make available to student borrowers.

Get matched with a personal loan that’s right for you today.

Learn more

Sure, the total amount of interest that’s paid over time will be higher, but let’s not mince words: until the higher education sector either chooses or is forced to address the increasing unaffordability of its core product — education — those who want it will also need financing structures that don’t end up condemning them to a subsistent post-graduation existence.

Hopefully, Oregon’s representatives — as well as others who may be tempted by the favorable press the bill attracted — will come to the proper realization that their constituents would be better served by their tackling the underlying problem than crafting Faustian bargains such as this.

This story is an Op/Ed contribution to Credit.com and does not represent the views of the company or its affiliates.

Image: iStockphoto