August 20th, 2014
Remember Oregon’s “Pay It Forward” plan? Students would attend college with no upfront tuition charges and instead pay a small share of their earnings after they left school for about 20 years. In essence the plan was a new way to channel revenue to higher education. It levied a graduate tax on anyone who used public higher education and then earmarked those revenues right back to funding more higher education.
The idea is quite elegant, but it has a major financial blind spot—one that got the better of many advocates and the press as they gushed over the idea. This month, Pay It Forward suffered a serious setback after the panel charged with conducting a feasibility study of the plan realized that the state of Oregon cannot bend the laws of public finance. As such, Pay It Forward would be expensive and probably isn’t going anywhere. For 4,000 annual enrollees, Pay it Forward would need fresh cash each year for 20 years, peaking at $20 million a year. Two decades in, the plan would then flip to surplus.
Surely, many are wondering: How could Pay It Forward be so expensive if students would be paying for their own educations, perhaps even more than they do now? The answer is that it costs money to move money through time. Pay It Forward enthusiasts often ignored this fundamental law of finance.