Just Say NO To Federal Educational Aid

Policy analysts say that President Clinton's proposal to allow families to deduct up to $10,000 in tuition from their annual taxable income or take a $1,500 tax credit for the first two years of college is bad tax policy and worse education policy.

• The tax credit would give families no real purchasing power increase because colleges would have no incentive to hold down their prices -- and would simply work the tax break into their tuition calculations.

• The nearly four million low-income students currently receiving Pell grants would not qualify for the tax plan.

• But the plan could cost $43 billion over six years, according to former Congressional Budget Office director Robert Reischauer.

Critics say this plan will work no better than the direct student loan program. Under this program, which President Clinton promoted in his 1992 campaign, the Department of Education makes direct loans to students, rather than simply having the federal government guarantee repayment of loans to students made by private banks.

The President claimed this would save the government and students money. But the private sector usually offers lower interest rates and lower fees than do the government direct student loan programs. Although monthly payments may be lower for the direct loans, in many cases repayment schedules amount to less than the accruing interest. Thus the outstanding balances can grow dramatically. For example,

• A student who borrows $50,000 could have an outstanding balance of $79,000 after two years.

• Although the government forgives any unpaid balance after 25 years, the borrower would still have to pay $22,000 to the IRS for the forgiven loan -- with taxpayers picking up the remaining $57,000.

The Department of Education delivers basically the same number of grants, college loans and campus awards that it did four years ago -- only now it spends hundreds of millions more a year.

Source: William D. Hansen (Education Finance Council), "An Ivy-Covered Shell Game," New York Times, October 19, 1996.