The plan, called "Pay it Forward, Pay it Back," would allow students to bypass traditional lenders and their interest rates. The state would have to seed the program, but designers say the fund would become self-sustaining.
A bill to develop a pilot program for Pay it Forward was passed unanimously in both houses of the legislature, as lawmakers, students and parents remain frustrated with skyrocketing education costs, and as Congress fails to act on doubling student loan interest rates.
The idea originated with the Economic Opportunity Institute, a nonprofit that bills itself as "a think tank for the middle class." Oregon's plan is similar to income-based repayment plans used in the U.K. and Australia.
A version of the idea was presented last year by students and professors at Portland State University. Student Tracy Gibbs said that by freeing graduates from the record debt many now face, the plan would allow young workers to buy houses, support families and contribute to retirement accounts.
"This will open up for our generation the same opportunities that our parents and grandparents had when they were done with college," Gibbs said.
About 21,000 first-year students entered public state colleges and universities in 2010, paying $171 million in tuition. To move 24 classes of students into the program would cost more than $9 billion over 24 years -- until enough students are paying back into the system.
Students who don't graduate would still pay a fraction of their incomes based on how long they were in school. Experts estimate that most students will have paid off their education in about 20 years, with the remaining four years of payments, give or take, being the "pay it forward" element.
Critics say students with the highest earning potential wouldn't participate in the program, when traditional interest-based student loans may be better for them.
Lawmakers in Washington, New York, Pennsylvania and California have expressed interest in the idea but Oregon is the first to take legislative action on it.