Student Debt: Pay it Forward White Paper.

Bill Sams, 9 December 2020: In memory of Lew Mandell

Keep students responsible for their debts

Align payments with benefits

Becomes self-funding

The Pay it Forward concept is the solution to the student debt crisis. This solution maintains repayment responsibility, aligns payments with benefits over the repayment period, and significantly reduces early year payments. This solution establishes tuition payment trust funds for all higher education from vocational to medical schools. And it becomes self-funding, removing the need for future funding by the States or Federal Government.

Maintains repayment responsibility

Restructure current student debt (92% held by the Federal Government) from a loan payment to a lease concept based on future tax payments. Students sign an agreement to pay ½% additional federal income tax for each year of education. For two-year community colleges, that is 1% and 2% for four-year programs. As with insurance, the repayment period will repay the tuition amount by the end of the period. Rough estimates put this at ten years for community colleges and 25 years for universities due to higher costs.

Aligns payments with benefits

Income determines the payments; no pay, no payment liability, high incomes make larger payments. Payments have a set time that, like insurance, is calculated on tuition costs and graduates’ average income.  The initial repayment time set actuarially achieves full repayment. A graduate from Harvard would pay for a longer time than a graduate from Boise State. Payment times are adjusted every few years to reflect current data on cost and average income.

Significantly reduces early year payments

The first-year payment for Pay it Forward on a $100,000 student tuition debt would be $1,000 versus the over $8,000 for the current system. A significant portion of the savings results from eliminating the 5.8% interest payments on the existing loans. Nine for-profit loan administration companies are paid in total $40 Billion a year to administer the program. These companies do not provide funds or bear the risk of default, as do mortgage banks that also provide administration services and profit on loans for under 3%. Over half of the repayment will be made in the last eight years of the payment term and catch up from the earlier lower payments.

Establishes tuition payment trust funds for all higher education from vocational to medical schools

The program is Federally funded and administered by the States. Each State certifies the approved educational providers and is responsible for auditing the reasonable tuition costs. Only academically related costs for faculty, academic administration, and facilities are allowed. Costs for fundraising and sports programs are not allowed. Students by social security numbers matched with schools by State Certification numbers enable tracking the time associated with the educational period.

Becomes self-funding, removing the need for future funding by the States or Federal Government

Over the term of the agreement, the income tax repayment amounts are credited into a State Pay it Forward Fund. Each accredited educational institution receives the graduate repayments, irrespective of where the graduate lives or works, based on the amount of education provided. Over the 25-year agreement term, the annual payments of 25 graduates will equal the cost of the current student’s tuition. At this point, the education provider has a secure source of tuition funding in perpetuity. Also, at this point, there is no need for additional Federal or State funding.

Funding

Of the $1.7 T of current student debt, $1.5 T, or 92%, is currently held by the Federal Government and is already included in the National Debt. It restructures this from a loan with interest payment to future tax payments with only an accounting change. The Federal Government is already spending $100 B a year to make the student loans, another $40 B for the student loan program administration, and $28 B for Pell Grants. Rolling all of this spending into the Pay it Forward would cover a significant portion of the current annual costs, reducing year-on-year as more graduates enter their earning years.

The administration of the program would be by adding a single line-item to the Federal Income Tax Forms. States would provide the bulk of the remaining administrative support.