Experts Question Dukakis College Finance Plan

Democratic presidential candidate Michael S. Dukakis’ proposal to provide federally guaranteed loans to college students and require them to repay a percentage of their earnings for their entire working lives would work like Social Security in reverse: Instead of paying now for future benefits, Americans could benefit first and pay later.

“Education pays a lifetime of dividends, so it’s not unreasonable to ask people to repay those benefits over their working lifetime,” said Robert Reischauer, an economist at the Brookings Institution who proposed a similar college financing scheme last year. “Comparing the Dukakis proposal to the system we have now, it does help make college more affordable.”

But education experts say ideas like the Dukakis plan have foundered in the past because of problems that Dukakis’ campaign has not fully answered.

Must Pay for Itself

The program, as Dukakis seeks to design it, must pay for itself. But that might mean a repayment burden so great that too many students--especially those who expected to earn high salaries--would refuse to participate.

“Nobody else has yet figured out how to make these programs (self-supporting),” said Pat Smith, the education financing specialist at the American Council of Education, an umbrella organization for 1,500 colleges and universities. “If they can figure it out, I’m all for it. But at this point, I am very skeptical.”

Officials at Dukakis campaign headquarters in Boston acknowledged Thursday they have not worked out many of the details of the plan, called STARS (Student Tuition and Repayment System). They also said that because of the lifetime repayment expense, few students would be in a position to rely heavily on the new financing scheme as a substitute for current loan programs.

‘Plan of Last Resort’

“The concept will work, but it is going to take a lot of bright people sitting in a room together to flesh out the program,” said Gene Sperling, one of the key Dukakis campaign experts who prepared the plan. “We see this as a complement to current programs, not a replacement. It will assure students who want to go to college that there is an education financing plan of last resort.”

Reagan Administration officials were quick to criticize the Dukakis proposal.

“Under the Dukakis plan, you can’t retire your debt until you retire,” said Bruce Carns, a deputy undersecretary of education. “And it is fatally flawed because it depends on the willingness of those who earn more to not only pay off their own loans but those of other people as well. That’s why you won’t get enough people of the right type to participate.”

The Dukakis college financing plan would require participants to repay their loans after joining the work force through a payroll withholding mechanism similar to Social Security. An individual’s payments, based on the amount borrowed, would be assessed as a fraction of his annual earnings.

Since all students graduating in a given year would be charged the same rate, students whose college educations led to careers with above-average incomes would effectively subsidize the loans of those whose earnings were less. Much like Social Security, however, there would be a cap--as yet undetermined--on the amount of income that would be assessed for loan payments.

Call Plan Fairer Than Rival’s

Campaign officials argue that Dukakis’ plan is fairer than that of his Republican rival, Vice President George Bush.

Under a Bush proposal, parents could establish tax-free college savings accounts to help pay future educational costs of their children. Those with higher incomes could more easily afford to set aside money for their children’s education, and they also would receive a greater tax benefit from the interest earned on the savings. To partially deal with this aspect of his plan, Bush has proposed to eliminate the tax benefit for those with family incomes above $80,000.

The key advantage of Dukakis’ proposal, advocates said, is that it avoids burdening individuals with crushing debt payments when they are just starting out their careers and generally have lower incomes than they will at later stages in their life.

“The existing system puts a big burden on recent graduates and perhaps encourages people to avoid occupations where they might not make as much money right away,” said Reischauer.

Existing Loan System

For example, a student today who received government-subsidized loans of $10,000 at 8% interest to be repaid in 10 years would be required to start paying $122 a month shortly after graduating from college. Those who could not qualify for such loans would probably have to pay banks close to 12% for student loans, so their monthly payment would be $143.

Under Dukakis’ proposal, by contrast, a student who earned the average income for recent college graduates--$19,750--would pay just $21 a month, or 1.25% of income, if the assumptions of economists who worked on the plan proved accurate. Under what some analysts believe are more realistic projections, the initial monthly payment would be $42, or 2.5% of income.

While the percentage would remain the same, these payments would rise in step with the natural increase in income, so that by the time he retired the average individual who received 5% annual raises and was earning $137,760 would be paying between $144 a month under the optimistic scenario to perhaps $287 a month under more pessimistic assumptions. The average student who borrowed $10,000 under the Dukakis plan might end up paying between $31,576 and $63,152 before retiring. By comparison, for a 10-year, $10,000 loan, a student would end up paying $14,520 for the government-subsidized loan and more than $17,000 for the unsubsidized one, the disadvantage of the latter loans being higher monthly payments immediately after entering the work force.

Differs From Other Schemes

Other schemes to base college loan repayments on the future income of the student have been floating around in recent years, but none of them require a student to keep paying over his or her entire working life.