On July 1, the Oregon legislature unanimously passed a plan to allow students to attend public colleges and universities tuition free and without incurring college loans.
The plan is revolutionary, and long overdue. It could change the politics of student debt nationally. The program permits an Oregon resident to attend an Oregon public university or community college, and pay back the state a percentage of income over a 24-year period, 3 percent of income for a four-year university, 1.5 percent for a community college. This system, called Pay It Forward, will be tried on a pilot basis, and then if the legislature reaffirms it, will be available to any Oregonian.
Let's take a few steps backward and review how we got to where we are. A generation ago, public universities were for the working and middle class. Tuitions were extremely low, and it was rare for students to incur large debts. Most of the cost was paid by state legislatures. These institutions, mostly dating back to the land-grant subsidies of the Lincoln era, were one of America's great mechanisms of upward mobility.
Then three things happened. State legislatures got caught up in tax cutting fever. They had to compensate for lost revenues, and little by little cut back on public support for public universities. By 2012, most public universities got less than a third of percent of their support from the public. In some states, the figure was less than 15 percent. The burden of tuition was shifted to students.
Meanwhile, the federally guaranteed student loan program had become a bonanza for Wall Street. With the government guaranteeing the loans, the private companies like Sallie Mae didn't lose anything if the student couldn't pay. So they loaded up students with debt.
An entire generation, soon to be two generations, began economic life saddled with debts that made it more difficult to buy a home, start a family, or gain economic traction. The prolonged economic slump and changes in the labor market reducing the share of standard salaried jobs with decent pay and benefits made student debt that much more onerous. Wall Street successfully lobbied for a provision in the bankruptcy code providing that even declaring personal bankruptcy does not relieve the obligation to repay a student loan.
Oddly, this issue has been mostly depoliticized. The Obama Administration did sponsor a good reform in 2010 that requires new federal loans to be direct loans, rather than government guaranteed loans made by private lenders. But these loans are administered by the same private lending companies such as Sallie Mae, which try to persuade students to opt for higher-priced private loans. And the Obama reform did not include refinancing, so students with existing loans are stuck with high interest rates, despite the Fed's policy of keeping interest costs low.
Several other states are now looking at the Oregon plan, or something similar.
The one complication is the need for public front money. The state will need to provide the funds to replace money that would have been provided by debt-funded tuition, so that university budgets remain intact. Over time, as payments to the state revolving fund begin accumulating, the program is self-financing. But to get it started public money is needed -- and at a time when state budgets are strapped.
The Oregon Plan commits the state legislature to provide the money. Other legislatures could do the same. Better yet, the federal government could authorize special bonds that the Federal Reserve could purchase, just as it purchases toxic securities held on the books of banks.
This plan accomplishes several purposes. First, it reminds us that our great state universities and colleges are public institutions, and need to be funded as such. Public debt and taxation are a sounder way of funding public higher education than the imposition of private debt. A repayment obligation calculated as a portion of income is far fairer than a program of private indebtedness.
Second, the Oregon option makes the disgrace of student debt a higher-profile political issue and creates a sound alternative to the current mess. The idea was first proposed by the Oregon Working Families Party, but it had such appeal that even Republicans felt compelled to support it.
Third, Pay it Forward injects the hidden issue of class back into our politics. Students with affluent parents do not begin their economic lives saddled with debt, because the family typically pays for college. And that's only the beginning of a family welfare state package that often includes financial help with a first home or the expenses of starting a family.
Today, the social class of one's parents determines educational and financial success more than at any time since World War II. But the children of the non-rich, who far outnumber the children of the rich, need higher education once again to be the great meritocracy.
Author's note: Clarification: Barbara Dudley of the Oregon Working Families Party, one of the key architects of the Pay It Forward plan, advises that statewide implementation of the plan requires not "reaffirmation" by the legislature, as I suggested, but explicit legislation. She notes that efforts are moving forward to qualify a ballot initiative for a constitutional amendment in 2014 to provide the front money for the Plan through "human capital" bonding authority. The widely quoted three percent of income payback figure was in Working Families Party proposal, but not the legislation enacted earlier this month authorizing a pilot program. Much political work remains to be done before this plan is universally available.
Robert Kuttner's new book is Debtors' Prison: The Politics of Austerity Versus Possibility. He is co-editor of The American Prospect and a senior Fellow at Demos.