Student Loan Bank Plan

Last September the President's Commission on Educational Innovation announced a revolutionary plan that would guarantee any student as much money as he needed to finance his college education. The panel's chairman, Jerrold Zaccharias, Institute Professor at Massachusetts Institute of Technology, explained that his committee wanted Congress to create an Educational Opportunity Bank which could loan money to every undergraduate who asked for it. Repayment would be based on the student's earnings after graduation.

As an example of the rates that could be used, the committee suggested that for each $3000 a student borrowed, he might be required to repay one per cent of his gross annual income for 30 years after leaving school. If a participant in the program borrowed $6000 and earned $10,000 each year after graduating, he would pay the Bank $200 a year, for a total of $6000 at the end of the period. Most students would probably pay the Bank more than they had been loaned, but anyone who earned a high salary quickly and felt that he would lose too much by staying in the repayment plan could "buy-out" by paying off the amount he borrowed--compounded at standard six per cent interest rates.

Both parents and universities have been pressing Congress to adopt a comprehensive student aid program like the Zaccharias proposal. Educational costs have been rising at an average rate of five per cent a year, so even middle-income families have been compelled to seek financial aid. Harvard estimates that a typical family with three children will ask for assistance at an income level of $16,000; New York's Board of Regents says that a family with two children needs a net salary of $9,000 to support a student who commutes to a public college. And as costs continue to rise, universities find it more difficult to provide additional aid funds to meet the rising student need.

The Senate tried to solve the problem last April when it approved a bill sponsored by Sen. Abraham A. Ribicoff (D. Conn.) which allowed everyone who pays college tuition costs to receive a credit on his income tax. Ribicoff had introduced his plan in several earlier sessions, but it had never been close to passage before last year, when Senators began feeling pressure from their constituents. However, tax leaders in the House agreed with criticism which had been offered in the Senate, and the Ribicoff bill died in committee. Senate liberals had condemned the plan as "class legislation" since it did nothing to help low-income families, whose tax payments are small. Furthermore, although the tax credit discriminated in favor of middle-income families with children in college, its maximum allowance of $325 would not have helped them very much either.

Attention has been turning to new proposals because existing federal programs have not been able to provide massive assistance to students. Since almost all of the current measures must rely on Congressional appropriations for funds, they have been kept relatively small--total aid appropriations for this academic year barely reach one billion dollars. One major plan, the guaranteed loan program passed in 1965, was instituted in an effort to turn from government appropriations to private lending agencies, but its performance has disappointed those who saw it as an alternative to endless government grants. High-interest rates in the past two years have made it difficult for students to persuade banks to make loans to them at the six per cent interest rate specified by Congress. Easy money might not help the plan either, since bankers would rather lend their available funds to long-time customers. The loan program also requires a costly amount of paper-work.

Both the older NDEA loan program, which is funded by the government, and the guaranteed loan program limit the amount that can be borrowed and require that it be re-paid in ten years or less. Without these limitations, compound interest charges would make re-payment almost impossible.

The Zaccharias plan avoids all of these problems. After an initial funding period of about 20 years, the proposed Bank would be self-sustaining. Borrowers would begin to re-pay more than they had been loaned, so there would be no need for perpetual government expenditures. However, the initial outlay needed to set up the Bank might be a formidable obstacle. Assuming that costs continue to rise and that all college tuition fees are paid by Bank loans, the Zaccharias committee estimates that in 20 years the Bank's outstanding fund might be as large as $250 billion, or one-seventh of the projected GNP. A substantial portion of this fund would be provided by sale of government bonds and by Congressional grants.

Its repayment provisions would make the Zaccharias plan much more attractive than other loan programs. Interest rates would not influence the payment schedule, so a student could borrow as much as he needed. Having repayment tailored to income would also free a borrower from the compulsion to enter a high-paying job in order to pay off his loan and accumulated interest charges as quickly as possible. A borrower's obligation to the Bank would end at his death instead of being passed on to his estate.

Unlike the other plans, the Bank would provide a comprehensive solution to the problem of aiding students. For the first time, a student from a low-income family would be guaranteed that he could find enough assistance to finance a college education. In order to reduce the amount an exceptionally needy student must borrow, the Zaccharias committee will probably recommend direct federal aid for families in the lower income levels.

The major effect of the Bank will be to enable any student to pay his expenses at any college which accepts him. Even when a student's family can afford a more expensive university, his parents often urge him to enroll in a public college or in one which offers him the most financial aid. With the favorable terms available at the Bank, a student will be able to make up these differences with a small loan.

Ending this financial pressure would weaken state universities, whose low fees attract state residents, and community colleges, whose students usually cannot afford to live away from home. Unless they would be willing to see their best students use the loans to attend a more expensive college, institutions would be forced to compete for them by raising the quality of their education. This process would probably lead to higher tuition costs.

From the student's point of view, the Bank would represent a new source of freedom. Assured of an alternative to total dependence on his parents or college aid program, he could assume greater responsibility for his education. Andrew M. Gleason, professor of Mathematics and a member of the Zaccharias committee, hopes that this independence would make administrators of large universities "more responsive to student desires." He argues that administrators of state universities can ignore student opinion because the vast majority of students are "locked in" by the low fees and cannot afford to attend another institution. With Bank loans available, students would no longer be forced to enroll in a college whose policies they did not like. Predictably, the National Association of State Universities and Land-Grant Colleges condemned the Zaccharias plan just a few hours after it was released to the press.

Criticism of the plan has centered on two questions--whether students should pay for any of their education, and whether they should pay for all of it.

Advocates of "free tuition" have denounced the plan because it would make student indebtedness a permanent feature of their higher education. Supporters of the Bank are not worried by this charge. College graduates receive much higher salaries than people with less education, so they can be expected to pay part of the cost, By basing re-payment on a borrower's income, the Zaccharias plan in theory charges each participant in direct proportion to the financial benefits which his education gives him.

Nevertheless, sentiment for free tuition is not completely unfounded. Society also benefits if its electorate and labor force are well educated, and it has a vital interest in helping maintain its educational institutions. The second question uncovers the greatest trouble with the Zaccharias plan: the Bank might serve to excuse the nation from its responsibility to educate its citizens.

In the past students have been forced to bear only part of their university's rising costs. Other sources of revenue--government assistance, endowment income, and private gifts--have grown fast enough to keep student fees down.

But educational costs have begun to soar. Kingman Brewster, president of Yale, estimates that his operating budget will climb from 89 million dollars to 206 milion dollars by 1976 without a change in enrollment. At present, no one foresees any significant increase in public or private aid to cover these rising costs. If the Bank loans were generally available, Congress and wealthy donors might even feel justified in reducing the present level of their aid. Since the Zaccharias plan assures that every student can finance his education regardless of its cost, colleges would probably raise student charges to incredibly high levels to pay for the vast increase in their own expenses.

Gleason and others who support the Bank deny that shifting many of these costs to students will by-pass society or hurt borrowers. They point out that the country would still pay in real terms by diverting resources from production to education. They predict that a student who borrowed money to meet his huge expenses would be able to push up his salary to compensate for the large amounts he would owe the Bank.

In money terms, though, it would be the students who would pay for their education, and it is unlikely that many of them would have sufficient market power to force their incomes to such high levels that they would not mind sending a great deal of money to the Bank each year.

While students will naturally have to absorb some of the rising costs, shifting all of the increase to them would be an undesirable result of the Zaccharias plan. "It would be unfortunate if attention were focused on just this one program," R. Jerrold Gibson, Assistant Director of Financial Aid, cautions. "When you head into a crisis like this one, you have a tendency to look for first aid. What you really need is a balanced solution."

Congress to adopt a comprehensive student aid lems with the proposal. Under the terms suggested by the panel, it would be profitable for a wealthy student to borrow money, invest it, and buy out of the program immediately after graduation. Nevertheless, the easy availability of the loans is one of the principal attractions of the plan, and the committee has recommended that a student be required only to sign a form stating that he needs the money for his education.

It has also been pointed out that women who borrow money and have to re-pay it might seem less attractive to men looking for wives. The committee has proposed several ways to minimize this handicap.

Prospects for immediate passage of the program are dim. The Administration wants to delay new domestic expenditures until the war in Vietnam ends. The President's Science Advisor, Donald F. Hornig, refused to endorse the plan when he presented it to newsmen. Zaccharias had reported that his committee wanted the Bank plan "pressed and pressed to completion," but Hornig stressed that "we are not proposing establishment of the Bank. We are releasing the proposal as an idea that has to be shaped by public discussion."

In the next few years pressure for massive federal assistance to students is certain to increase. The Zaccharias proposal for a Bank is the most efficient way of providing this aid yet devised. Despite the Administration's caution and the opposition from the large public universities, it seems likely that the Zaccharias plan will eventually be enacted.

Besides helping individual students with their choice of college, the Bank would reinforce currently strong aid programs at the high-cost colleges like Harvard, which is already searching for new ways to help students meet their bills. If it is coupled with increased public and private aid to universities, the Bank can present one long-term answer to the financial problems besetting higher education.