Here's An Alternative to Student Loans

Students pay a percentage of their income after graduation.

ByABC News
July 22, 2013, 4:51 PM

July 23, 2013— -- The higher education system that so many students see as a ticket to a better life sometimes seems to work against them -- particularly if they're from low-income families. College is getting more expensive, students are taking out more loans than ever, and Congress can't agree on how to get interest rates under control.

One microlending program in California, 13th Avenue Funding, thinks it might have found that alternative to the current education-lending market.

Call it the "pay it forward" approach: 13th Avenue gives low-income students access to critical funds, then offers pay-as-you-go terms to graduates. Those who benefit from their college degrees pay back. Those who don't pay less, or nothing at all.

It's not so much a traditional loan as a venture capital approach to college funding, says Bob Whelan, chief executive of the initiative.

13th Avenue isn't operating in a vacuum: Different versions of the "pay it forward" model are starting to garner attention from government officials.

Oregon's legislature recently passed a bill that calls for a pilot program to test the idea. It would let students at the state's universities pay back their tuition as a percentage of their income after graduation without having to pay tuition up front.

Australia, too, has a similar model, where students pay a percentage of their income after graduation to cover their college costs.

In each case, the idea is to have current students pay back money that will eventually fund the college costs of future students, who will in turn fund a new set of students down the line.

In the case of 13th Avenue, students who previously attended community college receive $15,000 to help pay for their third and fourth years of a bachelor's degree program. Once they begin earning more than $18,000 per year, they pay five percent of their salary to the group for up to fifteen years.

The students are encouraged to go after scholarship money and possibly even federal loans as other options, and to use 13th Avenue to fill the gap.

The program launched just last year in Southern California, and there are only 11 student participants so far. It's far too early to decide whether it will be a success since no students have graduated and started jobs yet.

But for a student who graduates and makes just $20,000 per year (people making minimum wage and working full-time earn about $15,080), it actually makes some sense.

The program is obviously less ideal for students who graduate and immediately begin earning sizeable salaries: They would pay out far more than they were initially given. Someone who makes minimum wage, however, would never pay for their degree.

Zakiya Smith, strategy director for Lumina, an independent, private foundation looking to increase the proportion of Americans who have access to a college education, says she sees both benefits and drawbacks to the "pay it forward" model.

"It could potentially ease some of the concerns about the financial risk people take when they go to college," said Smith, who previously served as a senior policy advisor to President Barack Obama.

But there's also uncertainty, because students don't know exactly how much they'll make after graduation, so they don't know how much they'll pay. For student loans with fixed interest rates, students have the ability to calculate the ultimate cost at the beginning.