Early last February, the Reagan Administration announced that its fiscal 1983 budget would call for substantial reductions in federal spending for student financial-assistance programs.
In the four months since that announcement, Mr. Reagan’s supporters and his opponents have engaged in an acrimonious debate over the possible impact of the proposed budget cuts. The Administration con-tinues to affirm its position that the President’s proposals will not deny students access to higher education, a claim the President’s opponents vehemently denounce.
President Reagan was so upset about the strong reaction to his student-aid proposals that he took the unusual step of addressing the topic in a nationwide radio broadcast last April from Barbados, charging that his opponents were misleading the public. They responded almost immediately, claiming that the President was guilty of understating the effects of his proposed cuts. U.S. Secretary of Education Terrel H. Bell, in a press conference early last month, blamed both the groups resisting aid cuts and the media for misleading the public and for creating panic among students.
The result of this long-running series of charges and countercharges has been inconclusive. Observers on Capitol Hill remain divided in their assessment of the effect that the aid reductions could have on students’ ability to attend college. And mindful of last year’s budget-reconciliation process, they are also hesitant to predict how the Congress ultimately will act on the President’s total budget request, of which student aid is only one part.
Final Congressional action on the budget request, which is expected to occur late this summer, unquestionably will influence the higher-education plans of students who are still in high school. All federal aid to college students, with the exception of the Guaranteed Student Loan (gsl) program, is “forward-funded,” meaning that the impact of decisions made this year will not be felt until the beginning of the 1983-84 school year.
Specifically, the Administration’s proposals, if approved, would: reduce funding for Pell Grants by approximately 40 percent, reduce funding for College Work-Study by 28 percent, cut off new capital contributions for National Direct Student Loans, and eliminate federal funding for the State Student Incentive Grant and the Supplemental Educational Opportunity Grant programs. (In addition, Social Security education benefits are being phased out over the next three years as a result of Congressional action last summer.)
The proposal would also prevent graduate and professional students from borrowing under the guaranteed loan program. They would instead have to borrow at higher interest rates under a new loan program--Auxiliary Loans to All Students (alas).
Undergraduates whose parents’ adjusted gross income exceeds $30,000 annually would have to pass a needs analysis in order to qualify for a gsl And under the Administration’s proposal, students obtaining gsl’s would be required to pay the government a “loan-origination” fee of 10 percent of the loan and would have to begin paying market interest rates on their loans two years after graduating from college.
To help sharpen the focus of the debate over the student-aid issue, Education Week invited two leading authorities on the topic--Gary L. Jones, acting undersecretary of the Education Department, and Dallas Martin, executive director of the National Association of Student Financial Aid Officers--to discuss their views on the proposed student-aid cuts.
Mr. Jones has been one of the Administration’s chief spokesmen for the President on student-aid matters. In his duties as deputy undersecretary for planning, budget and evaluation, earlier this year, he had primary responsibility for overseeing the preparation of the budget proposals.
Mr. Martin has long been recognized as an authority on student financial aid. His organization is a member of the Action Committee for Higher Education, a group that has spearheaded the drive against the President’s student-aid proposals.
Following are extended excerpts of separate interviews with the two officials. Text not enclosed in quotation marks is a paraphrase of the speaker’s remarks.
MR. JONES
I find it hard to understand how so many people can be so critical of the Reagan Administration’s plans to trim down federal spending for student financial aid in the upcoming fiscal year.
“The plain fact of the matter is that this Administration will make a $14-billion commitment to student financial assistance this fall. That commitment has never been higher in American history.”
Furthermore, college costs rose between 6 percent and 9 percent annually between 1975 and 1979, and enrollment grew by about 5 percent. But at the same time, the federal commitment to student aid grew more than 58 percent per year. Moreover, between 1978 and 1981, parents’ contributions toward their children’s education decreased by about 6 percent while their total incomes grew by about 30 percent in current dollars [not adjusted for inflation, which amounted to 51.3 percent during that period].
(See accompanying chart on page 12.)
MR. MARTIN
When the Administration says the federal government will spend more this year on financial assistance than in any other year, what it fails to mention is that practically all of the growth in that area is due to spe-cial interest allowances to banks making loans to students. And that growth is a function of higher interest rates, not additional student borrowing.
“Even if we were to cut off all student borrowing tomorrow, spending on the program would increase because the government would have to pay subsidies on outstanding student loans. I don’t deny that they’ll spend more money this year than last. The question, however, is whether or not they’ll be able to help the same number of students. The answer is no, and that’s a question that the Administration has ignored.”
The rapid growth of financial aid between 1976 and 1980 was due largely to expansion in the Guaranteed Student Loan Program. In 1976, only 26 states had agencies that guaranteed these student loans. By 1980, all 50 states had them. In 1976, only 51 percent of all students even had access to the loans, but by 1980 all students did, theoretically. ''Obviously, between 1976 and 1980 you find the greatest period of growth in terms of actual number of student borrowers.”
The gsl program will not grow substantially in the future. “From this point on, we believe that there may be some marginal growth in that rate, but for the most part it has peaked. Growth in program cost would no longer be a primary function of the number of students borrowing, if you held everything else constant.”
MR. JONES
“Over the past few years, the federal government has created a system that encourages parents not to spend money for their children’s education. Parents are telling their kids: ‘Don’t come to me for help, go to the government instead.’ We want to turn that system around.”
The belief that students and their parents should have primary responsibility for the financing of higher-education costs is the key to understanding President Reagan’s student-aid budget proposals.
MR. MARTIN
The Administration proposals clearly do reflect that belief. A review of the recent funding history of student financial-assistance programs “can only lead you to one conclusion: The President’s fiscal 1983 budget proposals will mean fewer dollars for fewer students.” (See accompanying charts on pages 12 and 13.)
“Funding for student assistance programs has been on a downward swing in the recent past. Higher education is not a spoiled hand wringer, it has already tightened its belt and has suffered more than a proportional share of cuts in view of the national interest and the economic problems we face. The reductions that we’re facing as a result of last year’s budget and the projected cuts in the 1983 budget, especially in light of rising educational costs, create a justified concern on everyone’s part.”
Despite what the Admininstration says in public, “its figures clearly demonstrate that it feels there is not a role for the federal government to play in financial assistance.”
MR. JONES
Not so. The Administration’s objective, basically, is to return to what has been the historic system in which students and parents bear primary responsibility for meet-ing the cost of a college education.
“All we’re suggesting is that people will have to borrow money first before they will receive outright gifts from the government. Many people still would receive free aid, and those who borrow money from the gov-ernment would not have to pay back a penny of principal until well after their graduation. I do not see how anyone can characterize that as a ‘Draconian’ system.”
This Administration has been particularly upset by press reports citing statistics from groups opposed to the aid cuts that estimate that as many as two million students will not receive federal assistance if the President’s proposals are adopted by Congress.
“That’s just not true; it’s nonsense. Aid is out there, particularly in the form of loans. We estimate that right now only 20 percent of the persons who could qualify for government-subsidized loans have actually applied for and obtained them.” Many of those who have not applied chose not to do so because it has been relatively easy to obtain outright grants with no strings attached.
About 200,000 fewer students than this year would participate in student-aid programs during the 1983-84 school year if the President’s proposals are adopted.
“Some students may very well receive less money from the government, but by no means does that mean that they will not be able to attend school.
“Some students, however, may not be able to attend school with the same degree of comfort as they used to in the past. But they still will be able to attend. The federal government’s responsibility is to assure student access to higher education, and not necessarily to assure student access to the school of a student’s choice.”
MR. MARTIN
The Administration’s “assertions that needy will be protected are empty.”
"[Secretary of Education] Bell, for example, has stopped using the example he cited when he first presented the Administration’s budget proposal last February. Then, he said a needy student could receive up to $9,000 in federal aid. Later, it was pointed out that such assistance would involve a debt of close to $23,000 for the student, which would be paid over a 10-year period at $190 per month, and a parental debt that would require 12 years of repayment at $200 per month for the first six years.
“It also was pointed out that no guarantee could be made that while the student certainly could qualify for this level of support, it would actually be provided. Receiving a loan is a far different matter from qualifying for a loan.”
Perhaps the most crucial element in the Administration’s student-aid proposal is an attempt to reduce the cost and growth of the Guaranteed Student Loan program, basically by denying some students access to the loans and by requiring those students who do secure loans to pay higher interest costs.
The Administration has defended its proposed student-aid cuts by saying that all remaining grant aid will be targeted to the neediest students. “That’s fine, but they fail to mention that many students are going to be left out of the equation,” he says. “Very poor and very rich students might do well under his proposals. But the middle-income and marginally needy students, how many of them are going to be erased out of the picture?”
MR. JONES
Very few, if any at all. Administration opponents “have been viewing student-aid cuts in a vacuum.”
“They have not taken into account the availability of loans under our proposals. Graduate and professional students would not be eliminated from eligibility for loans, they simply would be transfered” to the recently created Auxiliary Loans to All Students (alas) program. “All that we’re saying is that these students will have to pay off their loans at a higher interest rate and would have to begin paying back that interest to the lender sooner.”
MR. MARTIN
But the Administration is basing its proposals to alter the gsl program and to expand the recently created alas loan program on a set of assumptions that are “incredibly optimistic at best.”
Under the alas program, graduate and professional students would be required to pay 14-percent interest on their loans while still in school. “One has to wonder how students who need financial assistance in the first place will be able to muster this kind of money.”
“In addition, 14-percent interest is due on each loan that the student borrows. So that’s 14 percent in the first year of borrowing, which is also paid in the second year of school since the loan is still outstanding, while the student starts paying the interest on the second-year loan at another 14 percent.”
This continues through each year the student participates. “Once the student graduates, the payment of principal begins, again at 14 percent. It’s frightening to think of the consequences of students saddled with repayments of $25,000 and $40,000, maybe more, over a period of 10 years, with 14 percent interest rates continuing to accrue on unpaid principal. God forbid the student might have undergraduate loans to repay, too.”
“All of this assumes that the alas program will get off the ground. But it’s one thing to promise the goods and quite another to come through with them.”
As of last March alas loans were being made to students by banks in only 17 states. Furthermore, four states--New York, Connecticut, New Jersey, and Massachusetts--accounted for the vast majority of loan volume under the program. And these Eastern Seaboard states have perhaps the highest concentration of high-cost private colleges and universities of any region in the nation.
“The Administration assumes that alas will take off because there will be a strong financial incentive for banks to get involved in the program. We feel that is an incredibly sanguine assumption.”
Banks and other lending institutions strive to diversify their financial portfolios to the greatest extent possible. “These institutions historically have allotted a rather stable percentage of their assets for investment into different areas, including loans to college students.
“Eventually these areas of investment reach a certain saturation point, and once that’s filled, they will stop making loans in that area of investment.”
There is strong evidence that banks are reaching that saturation point with regard to student loans. “Lenders are hesitant to speak about this in public because they support the President’s economic policies in general. In private, how-ever, they are saying that they do not agree with the Administration’s student loan policies.”
MR. JONES
I am confident that the alas program ultimately will be a success. “Banks will receive a 3.5-percent interest subsidy from the federal government on the alas loans. It’s a poorly managed bank that cannot make money on a deal like that, and I cannot think of a single bank that does not want to increase its profits.”
Despite critics’ assertions to the contrary, the Administration is quite concerned about the problems that students would face after graduating from school with a high level of indebtedness.
“Naturally we are concerned about the burden of loan repayment on students. But why aren’t the institutions, the parents, and the students?
“College tuition rates have been growing faster than the rate of inflation. Why? Parents who are financially well off refuse to spend a dime to help send their children to college, telling them to borrow the money instead. Why?”
The answer is that previous Administrations encouraged a dramatic shift toward federal goverment responsibility for financing individual college education, a trend which began “when everyone was lobbying for a piece of the mythical Vietnam peace dividend.”
The Administration is also upset over critics who claim that the proposed aid cuts will have a disastrous effect on students attending schools in states facing serious economic difficulties.
“The President’s proposals are sensitive to a student’s true financial need. If students do not have access to funds, these programs will be there to assist them. It only stands to reason that more federal aid should flow to those states where need is the greatest.
“One congressman from Ohio said at a recent hearing that his state was facing a $1-billion deficit this year and that the federal government had no right to cut these funds. This congressman totally failed to recognize that the federal deficit is more than $1 trillion today; that meant nothing to him at all. You have to remember that all of these dollars come out of the same pocket, yours and mine, whether its federal or state taxes that you’re paying.”
MR. MARTIN
But the Administration has failed to examine the long-term effects of the President’s student-aid proposals and how they, in turn, will affect the nation’s economic recovery. If it had, it might have thought twice about encouraging students to amass high levels of debt before entering the work force.
“If students come out of school with large amounts of debt, will they buy cars, or new homes, or appliances? Of course not. Banks will not be willing to lend them the money to do so because they’re too far into debt already.”
That is ironic, because the Administration will be slowing down the very forces that could best stimulate the economy.
In the final analysis, the Administration’s student aid proposals “are bad public policy.”
“The hue and cry, and the anxiety that has been expressed in response to the Administration’s proposed budget for student financial aid is a real and legitimate reaction to a very clearly stated threat to refute the national interest in an educated citizenry for the short term sake of a numbers game.”
