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About the Pay It Forward, Pay It Back Education Financing Proposal

What is this “Pay It Forward, Pay It Back” page all about?

Public Act 98-920 directed the Illinois Student Assistance Commission (ISAC) to undertake a study to “determine the practical and fiscal impacts of adopting a program in Illinois similar to Pennsylvania's Pay It Forward Pay It Back program.” ISAC was asked to focus the study on “the particular intricacies, details, and mechanics of funding, with specific regard to the proposal contained in the language of House Bill 5323 as introduced.” The report was also to include a survey of similar programs within the 50 states, “with specific regard to funding and programmatic practicality and feasibility.”

As directed by the legislation, ISAC submitted An Analysis of the Feasibility of an Illinois Pay It Forward Program (“Report”), to the General Assembly on December 1, 2014. Read an Executive Summary of the Report, the Full Report, and/or the extensive Appendices.

To meet the new law’s mandate, ISAC’s report includes a survey of related legislative proposals in other states as well as a description of how “Pay it Forward” (PIF) type proposals have been implemented in other countries. It also includes research based on a broad array of resources on the topic, and incorporates public comments solicited from interested parties during the development of the report. The report examines both the arguments in favor of and opposed to the PIF concept, with the intent of establishing what elements would need to be in place to allow a PIF program to work in Illinois.

With the caveat that the modeling for the report was done using the best data and analytical methods available in the time allotted, the report also includes a simulation to provide a ballpark estimate of costs for a PIF pilot program in Illinois.

What is “Pay It Forward, Pay It Back”?

The term “Pay It Forward, Pay It Back” (PIF) describes a model of college financing that isn’t yet in use in the United States on any large scale.  Still, it has drawn a lot of recent interest from policymakers and the public alike. 

In PIF models, the state or the college initially covers all or a portion of the student’s education costs (which could include, for example, only tuition and mandatory fees), and the student pledges to pay a percentage of his or her income for a number of years after leaving school.  Ideally, after a period of many years, enough students would be paying back enough money that the system would become self-sustaining and no longer require additional support from the state or college to make up for the forgone tuition payments.

Have other states proposed a “Pay It Forward, Pay It Back” plan?

At least 24 states have proposed some form of “Pay it Forward, Pay it Back” legislation over the last two years. Some of those bills would create new statewide college financing models, some would establish smaller pilot programs, and some, like the bill in Illinois, would instruct an agency or group to analyze the idea and report back to the state legislature with findings.

Most of these bills, even those that required only a study of the concept, have not been advanced to become laws. See summaries of other state proposals in Appendix III and III-B to the Report.

To date no state has implemented PIF, even as a pilot program.

Are there different types of PIF programs?

Yes, there are two main types of PIF programs, with variations. Income Driven Repayment (IDR) or Income Based Repayment (IBR) Loan Programs are basically loans where the borrower’s payments are based on post-graduation income (or, if the student leaves school prior to graduation, the student’s income after leaving school). Some IDR/IBR programs are structured with payments for a fixed number of years and include loan forgiveness; others require repayment until the loan is paid off. Interest rates can vary from no interest (other than some sort of fee) to market rates. With these programs the payment risk (ability to pay) is minimized, but the number of years of payment is usually uncertain.

The other model for a PIF program is a Human Capital Contract (HCC) or Income Share Agreement (ISA).  HCC/ISAs are not loans, so there is no “principal” and no interest. Rather, with these types of programs, students pay a certain percentage of their income for a fixed period of years. There is no potential for a ballooning balance due to penalty and interest charges and little possibility that a student’s monthly payment will outstrip their ability to pay. While the total amount to be paid is uncertain, because it varies with the student’s income over the fixed time period, payment risk is minimized because it will always be a fixed percentage of their income.

What were the findings/conclusions of the Report?

The Executive Summary provides a bullet-point summary of the information in the Report. The legislation requiring ISAC to produce this report did not ask for recommendations, and the report does not recommend any particular course of action. It does examine arguments for and against the PIF concept, and it describes a pathway to the establishment of a PIF program if funding can be found.

Proponents of PIF promote the model as a means to address the rapidly rising cost of higher education in all sectors and the decline in the ability or inclination of the states to fund higher education. While it certainly does not make college free, proponents see the PIF model as a rational means of reducing the risks for students of going to college and of amassing student loan debt that is difficult—if not impossible—for many students to pay off. 

Opponents of PIF raise not only funding, operational and legal and tax uncertainties, but also a concern that such a program would mask declining state support for higher education and lead to increased privatization of higher education.

The report describes a pathway to offering a PIF option to most public university and community college students in Illinois that could make college more affordable for many students, particularly in the lower and middle-income ranges.  Doing so would, however, require billions of dollars in up-front costs from the state. Even in the case of a smaller, less expensive pilot program, the protracted nature of a PIF pilot and the costs associated with it mean that policymakers would have to commit substantial resources over decades—making a pilot feasible only if there is an intent to institute a full program. Moreover, there are significant legal and tax uncertainties of implementing a program with no direct precedent. The report cautions that it may not be prudent or practical to implement a pilot program without first addressing these uncertainties and identifying a source of funding for a full-scale program in the future.