Legislation introduced in the Michigan State Senate and House of Representatives would provide an alternative to student loans for residents seeking degrees from the state’s public community colleges and four-year institutions.
It’s an investment strategy of sorts: The state would pay for students’ educations, and in return the students agree to pay the state a percentage of their post-graduation salaries for a set number of years.
The ‘Pay It Forward’ Concept
Specifically, 100 community college students and 100 public university students whose adjusted gross income (or family’s adjusted gross income) is less than $250,000 will be able to participate in the pilot program, if approved by the state legislature. If there are more than 200 applicants, participants will be chosen at random.
For each year of tuition the state provides, community college students will annually pay the state 2% of their adjusted gross income for five years. For university students, the payment is 4% of income. Community college students in the program would receive up to three years of tuition payments, meaning they’d max out at paying 2% for 15 years. With a five-year tuition cap, university students would pay 4% for up to 25 years.
It’s called the SMART Act (Smarter Michigan and Retaining Talent), and students must maintain a 2.5 GPA to be eligible.
The Oregon state legislature is considering a similar program, which lawmakers introduced last summer.
Picking Apart the Solution
If you’re doing the math in your head, yes, the program is a bit of a gamble, no matter which side of the transaction you’re on. It all depends on these students’ salaries. The average lifetime earnings of a bachelor’s degree holder is about $2.3 million, according to the Georgetown University Center on Education and the Workforce. Two semesters at Michigan State costs $21,764 for residents. That puts four years at Michigan State at more than $85,000. Assuming the student works for 40 years at the same salary (not a typical situation, but useful for comparison’s sake), they’d end up paying the state roughly $46,000 over 20 years for that education.
So for Michiganders who graduate and take on low-paying jobs or fairly average salaries, it’s the investors who lose out (the funding for the program has yet to be determined, with the bill stating only that it would come from public and private sources). On the flip side, college graduates with lucrative jobs may pay more than they would have had they taken out student loans to fund their educations.
Should the program go forward, the legislature would evaluate whether or not it was worth continuing beyond pilot status, based on a variety of criteria. It’s unclear what would determine success, because the return on investment differs by perspective.
Mitchell Weiss, a finance professor and Credit.com contributor, has written about his unfavorable opinion of such proposals, saying the math makes no sense.
“Fundamentally, my problem with this is it doesn’t address the problem, it perpetuates it — the problem of higher education costs,” he said. “They (the lawmakers) are enabling the institutions to continue to charge high prices for education.”
On top of that, he takes issue with the fact that these students, unlike student loan borrowers, cannot satisfy their financial obligation faster, if they want. For instance, most student loans are structured to be repaid over 10 years, but if you want to knock them out in five, you can do that. This proposal locks you into five years of repayment for every year of school.
The Michigan state lawmakers behind these bills — Reps. David Knezek and Theresa Abed, and Sen. Jim Ananich, all Democrats — did not respond to requests for comment before publication.
More on Student Loans:
- How Student Loans Can Impact Your Credit
- How to Pay Off Student Loans With Forgiveness Programs
- A Credit Guide for College Graduates
- How to Pay for College Without Building a Mountain of Debt
- Strategies for Paying Off Student Loan Debt
Image: Gary Houlder