Dukakis Unveils a Plan To Permit Lifetime Student-Loan Repayment
Elaborating on his pledge to make a college education accessible to every young American, Democratic Presidential candidate Michael S. Dukakis last week unveiled a program that would allow students to pay back their college loans over a lifetime through payroll withholding.
The plan would "open wide the door of college opportunity to every youngster in this country who is qualified to do college work," Mr. Dukakis said in a speech at Kean College of New Jersey.
The plan is called stars, for Student Tuition and Repayment System. Mr. Dukakis said his plan was modeled after the Social Security payroll-tax system, but with the benefit--a college education--coming before the beneficiary's working lifetime rather than after it.
As with the existing federal loan program, students would take out government-guaranteed loans from local lending institutions. But unlike the current program, the loans would be repaid through mandatory withholding of a fixed percentage of income once the borrower got a job.
That percentage would be determined by the size of the loan and would be set at the time the loan was made.
The borrower would continue to make the withholding payments throughout his working lifetime, regardless of the size of the loan or the length of employment, according to Dukakis aides. The higher a borrower's income, the more he would repay, although there would be some limits on the total amount of repayment.
Some would repay far more than they borrowed, while others would pay less, the aides said.
Education Department officials said last week that a similar program had been tried at Yale University in the 1970's but failed because of the "unfair burden on borrowers who earned more."
"Somebody already laid this egg," said Secretary of Education William J. Bennett. "We have not seen all the details, but the Dukakis proposal looks suspiciously like the old Yale University plan that proved unworkable a decade ago."
The fundamental flaw of the plan, according to Deputy Undersecretary Bruce M. Carnes, is that it "relies on the willingness of people who earn more money to subsidize the loans of those who earn less."
He said that Yale officials found that there were not enough people willing to participate in that type of system. University officials were unavailable for comment at press time.
Gene Sperling, a domestic-policy adviser for the Dukakis campaign, disagreed with Mr. Bennett and his aides.
"The program will take some cross-subsidization, but we think we are drawing a proper balance," Mr. Sperling said. "The reality is that 17- and 18-year-old students are sitting down with their families and looking for a way to attend the college of their choice, and we think they will see this as a viable option."
Other student-aid experts were more cautious last week in criticizing or praising the plan. Most said that more study was needed before judgment could be passed on the idea, and that conflicting details of the proposal as presented needed to be clarified.
"It is an interesting approach to making broader opportunities available for college," said Charles B. Saunders Jr., vice president for governmental relations at the American Council on Education.
Mr. Saunders said the plan would be attractive to most lenders because the government would guarantee and collect the loans, thus re8ducing the major risks.
Carl Napp, a spokesman for the National Association of Student Financial Aid Administrators, said he awaited with interest more details from the Dukakis campaign on how the payroll-withholding mechanism would be established.
Aides to Mr. Dukakis asserted last week that the automatic withholding system would be self-financing and would significantly decrease the number of student loan defaults.
Mr. Carnes, on the other hand, predicted that the system would be "an administrative nightmare."
The idea of linking income to repayment of student loans is not a new one. In fact, the Reagan Administration has supported a similar concept, and a pilot Income-Contingent Loan program has been under way for more than a year.
Under the i.c.l. program, a student repays only the amount he borrowed, plus interest. The monthly payments are fixed for the first two years after graduation. Then they are set at between 5 and 15 percent of the borrower's income, until the obligation has been met.
Once the full amount has been repaid, the borrower is out of the program.
The higher-education community has strongly criticized the i.c.l. program because the burden of loan administration and debt collection would be placed on the university or college, and because a graduate earning a lower income would repay the loan over a longer period and thus would pay more in interest.
The Reagan Administration has envisioned that such a plan would eventually replace the existing student-loan programs.
Mr. Sperling said that the stars program would not replace current student-aid programs, but would supplement them.
Mr. Sperling said stars was designed to help middle-income families who often are not eligible for assistance, even though they cannot afford to send their children to college for four years.
Mr. Sperling said the lifetime-repayment mechanism would help new graduates who, under the current system, are overwhelmed by huge loan-repayment obligations as they enter the workforce.
The repayment rate could be set, he explained, at 1/8 of 1 percent for each $1,000 of a loan. For an $8,000 loan at this rate, such a schedule would commit a loan recipient to repay 1 percent of his or her income annually during a working lifetime.
A $16,000 loan would result in the withholding of 2 percent of annual income to repay the loan.
For someone earning $50,000 a year, withholding on an $8,000 loan at this rate would be $500 annually, and $1,000 on a $16,000 loan.
At an annual income of $25,000, the yearly withholding would be $250 on an $8,000 loan and $500 on a $16,000 loan.
A cap on the amount of income subject to withholding would be established, Mr. Sperling said. Moreover, the plan would include a "buyout provision" allowing borrowers to repay their loans--plus an unspecified premium--in one lump sum.
Loan recipients whose total payments had reached the buyout level through withholding would also be freed from any further obligation.
Some critics of the plan suggested, however, that the buyout level would be so high in such a program, that many borrowers would not reach that level during their working lifetime.
Interest on the loans would not be federally subsidized.
Since stars is tied to income, the unemployed and the nonworking disabled would not have to pay.
Education was also a theme last week for Mr. Dukakis's running mate, Senator Lloyd Bentsen of Texas.
The federal government can "focus attention" on the competition presented by foreign school systems and the importance of education and technical training to the economic future of the country, the Texas senator said during a campaign stop in Lawrenceville, Ga.
Responding to a question, Mr. Bentsen said he thought the federal government should also encourage local school boards to consider lengthening the school year.