A Revolutionary Student Loan Proposal -- 3,000 Miles From D.C.

Last week, the Senate came up with a partial solution to the student debt crisis. Under their proposal, which would tie student loan interest to the Treasury bill rate, rates will slowly edge up to a maximum of 7 percent for undergrad loans, 9 percent for grad loans, and 9.7 percent for loans to parents. There will be no special provisions for subsidized Stafford loans to help middle class and lower-income students.

It's a new proposal for a very old problem: For years, politicians and pundits have grimly predicted the explosion of the student loan bubble. The economics are simple: as educations become more expensive and jobs pay less money, college students have become more deeply mired in debt. Unable to pay back their loans, these fresh-faced (and, later, not-so-fresh-faced) grads cannot buy homes, get new cars, or otherwise stimulate the economy. As the vicious cycle continues, the economy gets further dragged down, jobs become harder to get, debt becomes harder to service, and grads have even less money to spend.

The problem got worse on July 1, when interest rates on subsidized Stafford loans jumped from 3.4 to 6.8 percent, making it much harder for needy students to pay for their education. Rates on unsubsidized Stafford and PLUS loans held steady at 6.8 and 7.9 percent, respectively. The Senate's solution would eventually make loan rates rise even higher, putting students deeper in debt and making it even harder for low-income students to get college degrees.

Innovation at the State Level

At the heart of the student loan battle lies a basic contradiction. While most policymakers agree that education is vital to ensure America's place on the world stage, politicians on both sides of the aisle -- including President Obama -- have focused on proposals that will increase the student loan interest rate, saddling students with an ever-growing burden. Put another way, America's government realizes that a well-educated populace is in the national self-interest, but isn't willing to pay for it.

On the state level, things are a little more optimistic. In California, FixUC, a student-run group, has drawn a lot of attention with its innovative solution to the student debt problem. Rather than forcing students to borrow money to pay for their education, the FixUC proposal is that they agree to pay 5 percent of their post-graduation salary for 20 years. In practice, this would function much like the Pay As You Earn program, but FixUC proposes a revolutionary shift in the way that universities regard their students. Rather than forcing grads to go it alone own against a shifting job market, the plan would encourage colleges and universities to take an active part in ensuring the employability of their alumni.

FixUC may seem like pie-in-the-sky, but at least one state is seriously considering a similar plan. On July 1, the Oregon state legislature unanimously passed a bill that would create a "Pay It Forward" pilot program. In broad terms, Pay It Forward would allow Oregon high school graduates to attend a state university for free; in return, they would have to pay 3 percent of their postgraduation wages for the next 20 years. In the beginning, the program would be funded with state bonds; later, revenues from graduates would keep it going.

It remains to be seen if Pay It Forward will work, or even if it's feasible. If Oregon does manage to implement the program, however, it would be a game-changer. Not only would it offer a promising solution that could be implemented in other states, but it would also likely be a boon to Oregon's economy. As numerousstudieshave shown, state investment in higher education is incredibly profitable in the long run, both in reduced costs for social services and in increased tax revenue. If Oregon becomes a mecca for college students, it seems likely that the state's benefits would extend far into the future.

Bruce Watson is DailyFinance's Savings editor. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

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