Building an Economy that Works for Everyone

Policymaker’s Guide to Pay It Forward

A long-term solution that would generate an ongoing and revolving source of revenue

For a PDF of the full report, click here.

Summary

Higher education is an avenue for individual achievement, an engine of economic growth, and a cornerstone of American democracy. In the not-too-distant past, state investment in public higher education ensured tuition was reasonably affordable (and college therefore accessible) to broad swaths of students from middle-income families. That is no longer the case today. Tuition has increased dramatically – not because the underlying cost of college has increased, but as a direct result of state spending cuts.[i]

Per-student public spending on higher education has declined in almost every state in the nation, even as the total cost of college at public institutions has remained relatively stable in inflation-adjusted dollars over the last 25 years (increasing just 0.35% a year on average since 1989). In 1990, state funding accounted for 75 percent of total revenue for public higher education across the United States. Today, it accounts for just a little over half, and states have doubled student tuition to close the gap. The steepest cuts have come in recent years on the heels of the Great Recession: since 2008, states have cut funding per full-time enrollment (FTE) by 19 percent.[ii]

policymakers pif guide - exec sum img1

Source: State Higher Education Executive Officers Association [iii], [iv]

Even as states have pushed an increasing share of the cost onto students and their families, enrollment has steadily increased nationwide, because people of all ages know how important a college education is for upward economic mobility and long-term financial security.[v] People in America rightly perceive a college degree as one of the most significant factors in promoting upward economic mobility and preventing downward mobility.

But the current system of ever-increasing tuition relies on students’ – especially those from low- and middle-income families – continued ability and willingness to take on ever-higher debt loads in order to finance their higher education. Many now choose to forego a college education altogether. Others end up with overwhelming student loan bills that prohibit them from participating meaningfully in the economy and achieving financial security: student loan debt, which stood at $360 billion a decade ago, now exceeds $1 trillion nationwide.[vi]

If higher education is to remain a public good, state governments can no longer ask students and their families to shoulder an increasing share of its costs. Policymakers can accomplish this using a combination of state investments that reduce tuition, increase need-based financial aid, and promote innovative programs to ensure continued growth in access to college. Pay It Forward is one such innovative program.

Pay It Forward is a college financing system under which, instead of paying tuition, participants would make post-graduation income-based contributions for a set period. Contributions are deposited into a state trust fund that directs payments to the participating colleges and universities, and that can be designed to become self-sustaining within one generation. It is not a loan or grant program, nor is it a replacement for tuition reduction or need-based aid. It is a social insurance program for higher education that can dramatically reduce students’ uncertainty about their future debt burden and supplement existing programs to serve a broader spectrum of students.

What sets Pay It Forward apart from other higher education proposals is that it is a long-term solution that would generate an ongoing and revolving source of revenue – fueled by forward-funding by graduates – all while replenishing and sustaining itself. It would open access to higher education by reducing high debt barriers and make a college degree possible without financially crippling an entire generation.

Footnotes

[i] Hiltonsmith, Robert. Demos. May 2015. “Pulling up the Higher-Ed Ladder: Myth and Reality in the Crisis of College Affordability.” Available at http://www.demos.org/publication/pulling-higher-ed-ladder-myth-and-reality-crisis-college-affordability.

[ii] State Higher Education Executive Officers Association (SHEEO). 2014. SHEF – State Higher Education Finance FY14. “State-by-State Wave Charts (XLS).” Available at http://www.sheeo.org/resources/publications/shef-%E2%80%94-state-higher-education-finance-fy14.

[iii] Ibid.

[iv] All amounts are shown in inflation-adjusted 2014 dollars unless otherwise specified.

[v] State Higher Education Executive Officers Association (SHEEO). 2014. SHEF – State Higher Education Finance FY14. “State-by-State Wave Charts (XLS).” Available at http://www.sheeo.org/resources/publications/shef-%E2%80%94-state-higher-education-finance-fy14.

[vi] Federal Reserve Bank of New York, “Student Loan Debt by Age Group,” March 29, 2013, available at https://www.newyorkfed.org/studentloandebt/index.html.

Technical Notes

These technical notes cover the following topics:

  • Financial modeling and the Pay It Forward Interactive Calculator;
  • Contribution rates and lengths for research universities, regional universities, and community/technical colleges; and
  • A comparison of Pay It Forward to loan financing.

A compendium of sources and notes is also included.

Pay It Forward financial modeling was developed as a joint venture between John Gibson and staff at the Economic Opportunity Institute. This brief includes a detailed description of the Interactive Calculator used to create financial forecasts for Pay It Forward modeling. A copy of the Pay It Forward Interactive Calculator (Microsoft Excel workbook) is available upon request.

Click here for a PDF of the technical notes.

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