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Michigan 'Pay It Forward' Bill Could Change The Way Students Pay For College

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If a new proposal is approved by the Michigan Legislature, the state's college students could soon go to school for free. Well, not exactly free: They would get interest-free loans to attend college and would pay up once they've joined the workforce.

The new payment plan introduced in Lansing would, if passed, set up a so-called "pay it forward" system, under which students won't pay a cent while in college. Instead, they would pay a fixed percentage of their future paychecks for roughly 20 years (5 years for each year of college). That money would go toward the cost of tuition for future students.

“The goal is to remove every financial barrier to high education,” state Rep. David Knezek (D-Dearborn Heights) told the Detroit Free Press. “We’ve increasingly placed the financial burden of college on the backs of the students. This is a no-interest plan that allows you to pay back as you go and as you can afford it. It takes the monkey off the student’s back.”

As today's students face rising costs for higher education and interest rate changes, the alternative payment plan could help ease the financial burden for future students.

Michigan's plan would set up a $2 million fund for a 200-student pilot program, which would let community college students pay 2 percent of their income, while university students would pay 4 percent. Only students with a household income below $250,000 would be eligible to participate.

The Associated Press reports that the bill's backers hope to expand the pilot program if it ends up being a success. But there may be a few kinks to work out first.

Even if the borrower has repaid his or her tuition before the fixed number of years is over, he or she will still have to pay until the set payment period is up. This issue pits higher earners against lower earners, which may deter some from signing up, says Susan M. Dynarski, professor of public policy at the University of Michigan.

“In the proposed Pay-It-Forward systems, a graduate who does extremely well in the labor market will end up repaying many times over the cost of her education, while one who does poorly will pay much less,” Dynarski wrote in a blog post for Brookings Institution. “There is therefore cross-subsidization in this system, with the 'winners' paying some of the college costs of the 'losers.'"

But the issue is fixable, she says. Dynarski proposed amendments that would alter the Michigan bill to keep those “winners” in the program, while incorporating a safety net for the flux of the job market.

“[D]enominate debt in dollars, and let borrowers pay their debt. If a student borrows $25,000 and (due to pluck and luck) earns enough that she has paid back the principal plus interest after just ten years, she will stop paying into the program,” she said. “If a borrower instead runs into hard times and still owes money after 25 years, the balance will be forgiven.”

Twenty other states are considering similar plans, according to the Free Press. In Oregon, a panel of education experts is currently studying the feasibility of a "pay it forward" system to weigh the costs and benefits of such a plan. If approved by the 2015 legislature, the group hopes to launch a pilot program with public university and community college students in 2016, according to The Oregonian.

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