PA28 TRANSITIONING FNT CLASS C EXPERIENCES CRITICAL ENCOUNTER WITH B727 DEP CLBING WITH VISUAL SEPARATION CLRNC.

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NIGHT INSTRUCTIONAL FLT FROM MBS TO ARB; MI. WE WERE TRANSITIONING FNT AIRSPACE WITH FLT FOLLOWING 6 MI W OF FNT HDG 150 DEGS; 3500 FT. CARGO B727 WAS TAKING OFF RWY 27 AND DEST WAS WBOUND. FNT ATC CALLED US OUT AS TFC WITH HDG AND ALT TO THE CARGO JET; THE B727 RPTED HAVING US IN SIGHT. FNT ATC CALLED OUT THE B727 TFC TO US; AND WE REPLIED TFC IN SIGHT. OUR SOUTHEASTERLY FLT PATH WOULD INTERSECT THE B727 WESTERLY FLT PATH; BUT THE B727 WAS LEVEL AT 3000 FT; WE LEVEL AT 3500 FT. FNT ATC THEN CLRED THE B727 TO 10000 FT AT PLT'S DISCRETION; BUT MAINTAIN VISUAL SEPARATION FROM THE REFED TFC (US). THIS MADE US NERVOUS SINCE OUR PATHS LOOKED TO BE XING AT THE SAME TIME. THE B727 CONTINUED FOR SOMETIME AT 3000 FT WHICH MADE US BELIEVE THAT HE WOULD PASS 500 FT BENEATH US. HOWEVER; AT THE PRECISE WORST POSSIBLE MOMENT THE JET PITCHED UP AND INITIATED A CLB. WITHIN A COUPLE OF SECONDS IT WAS APPARENT WE WERE ON A COLLISION COURSE. I TOOK CTL OF OUR ACFT; PULLED THE THROTTLE TO IDLE AND BANKED OUR ACFT TO THE R AS HARD AS I COULD INTO A DSNDING TURN. AS I INITIATED THE TURN; I HEARD THE B727 RPT AN RA TO ATC AND THE CAPT FRANTICALLY INSTRUCTING THE FO TO 'GET DOWN; GET DOWN THERE' BEFORE HE LET GO OF THE XMIT BUTTON. I LEVELED THE ACFT MOMENTARILY ON A NORTHERLY HDG AT 3100 FT THEN COMPLETED A 360 DEG TURN CLBING BACK TO 3500 FT AND OUR ORIGINAL HDG. AS WE TURNED S I COULD SEE THE B727 WELL BELOW US TO OUR R. FNT ATC ORIGINALLY THOUGHT I DSNDED AND CAUSED THE CONFLICT BECAUSE I WAS BELOW OUR ASSIGNED ALT; REPRIMANDING ME FOR FORCING THE B727 TO TURN TO AVOID ME. THE B727 THEN EXPRESSED THEIR DISSATISFACTION WITH ATC FOR CLRING THEM TO CLB INTO US AND INSISTED THAT ATC HAD 'POSITIVE CTL.' ATC QUERIED ME AS TO WHAT HAPPENED AFTER HE HANDED THE B727 OFF TO LANSING APCH. I EXPLAINED THE ENCOUNTER TO FNT ATC. MY PERCEPTIONS OF HOW THIS COULD HAVE BEEN AVOIDED: THE B727 SHOULD NEVER HAVE CLBED BEFORE PASSING BENEATH US. THE B727 OBVIOUSLY FORGOT WE WERE THERE OR LOST SIGHT OF US. HE HAD RPTED US IN SIGHT. ATC SHOULD NOT HAVE ISSUED A CLRNC TO CLB AT PLT'S DISCRETION; BUT RATHER A CLRNC TO CLB AFTER XING BELOW THE TFC AHEAD AND TO YOUR R (THAT WAS RPTED IN SIGHT) ESPECIALLY AT NIGHT. I SHOULD HAVE XMITTED TO ATC WHEN I HEARD A CLRNC THAT MIGHT PUT US IN HARMS WAY SUCH AS 'FNT APCH; CONFIRM JET TFC WILL REMAIN AT 3000 FT UNTIL PASSING BENEATH US.'