Sizing up cuts in federal student-aid programs

Uncle Sam helps send a lot of students to college. This year, 6 million students will pay for part of their higher education with government aid. All told, federally guaranteed loans and grants account for some 70 percent of financial assistance to US college students.

Student aid is probably among the federal government's most popular programs. But this section of the budget -- fast-growing, a benefit to the middle class as much as the poor -- may well feel budget-cutter's shears this year.

``Federal support of nearly 50 percent of all students enrolled in institutions of higher education is more than the nation can afford,'' warned Budget Director David A. Stockman in 1984.

Lyndon B. Johnson, once a schoolteacher himself, first pushed the federal government into large-scale student aid. At his urging, Congress in 1965 set up a student loan program (now known as Guaranteed Student Loans), in which the government subsidized interest rates and promised to repay the money if the student defaults.

In 1972, Congress added a student grant program, since renamed Pell Grants in honor of their champion Sen. Claiborne Pell (D) of Rhode Island. Pell Grants today entitle poorer students to an annual grant of $1,900, minus whatever amount the student's family can reasonably be expected to contribute to his or her education.

In the late '70s, college costs exploded upwards. Middle-class voters with children in college began to feel squeezed -- and Congress responded by loosening Pell Grant qualifications and eliminating the income ceiling on student loans. The costs of the programs also exploded. Between 1976 and '81, spending on Guaranteed Student Loans alone rose an average of 82 percent a year.

In 1981, at the dawn of the Reagan era, Congress cut into the student aid program by requiring a ``needs'' test for loan applicants whose family income was more than $30,000. This lopped 800,000 borrowers off the rolls, estimates the Congressional Budget Office. But since then, Congress has turned back repeated administration assaults on student aid. This year there is sure to be another such battle, administration officials say.

At the heart of the dispute over student aid is this question: Is too much aid money flowing to the middle class, at the expense of poorer students? Such a concern was raised by the National Commission on Student Financial Assistance, which reported to Congress in 1983. The mainly middle-class loan program, noted the commission, was growing rapidly, while Pell Grants for low-income students were not even keeping up with inflation.

The administration's response this year will be a proposal to slap a lid on student loans. The proposal would limit eligibility for subsidized loans to students whose family income is less than $32,500 a year, says an administration source.

President Reagan's 1986 budget also will propose putting a $4,000 limit on the federal aid -- both loans and grants -- any one student can receive annually. Eligibility for Pell Grants would be limited to students with family income of $25,000 or below. These cuts would save $5.4 billion over three years, estimates a Reagan official.

``It's a mild tightening,'' says this official.

Critics complain that the moves would be more drastic. At least 450,000 students would be dropped from the student-loan rolls, claims Patricia Smith, director of legislative analysis at the Amercian Council on Education.

``The cuts in Pell Grants would affect another 150,000,'' says Ms. Smith.

When you have a child in college, an income of $32,500 suddenly seems quite small, education lobbyists say. When you have two or more children in college, it seems even less than that.

A limit that doesn't take into account extenuating circumstantces, such as number of college-age children, is unfairly inflexible, claim these lobbyists.

The $4,000 cap on total aid ``would seriously affect the chances of poorer students attending even a moderate-cost institution,'' says Kathy Ozer, legislative director at the US Student Association.

Besides the administration's proposed limits, there are other student-aid cuts Congress may consider. Among them:

Chase defaulted loans. In 1983, students who defaulted on their loans cost the US $500 million, estimates the Congressional Budget Office. The federal government could reduce its default losses $100 million annually, says CBO, by leaning harder on banks and requiring states to share more of the default risk. Cut subsidies to professional and graduate students. Cutting the in-school interest subsidy for only professional students would save $500 million over four years, estimates the CBO.

The same move for all graduate students would save $900 million over the same period.

Reduce the interest-rate subsidy. Currently, financial institutions that participate in the Guranteed Student Loan program get a fixed yield about 3.5 percent above the bond equivalent rate for 91-day Treasury bills; reducing this subsidy half a percent would save $350 million over four years. Chart: Student aid outlays (Billions of dollars) 1980--$5.1

'81--$6.2

'82--$5.8

'83--$6.6

'84e--$7.1

'85e--$7.0

'86e--$7.3

'87e--$7.3

'88e--$7.4

'89e--$7.4 Guaranteed student loans 1980--$1.4

'81--$2.3b

'82--$3.0b

'83--$2.6b

'84e--$3.0

'85e--$2.9

'86e--$3.1

'87e--$3.0

'88e--$2.8

'89e--$2.7 Pell Grants, work-study, other 1980--$3.7b

'81--$4.0b

'82--$2.7b

'83--$4.0b

'84e--$4.1b

'85e--$4.1

'86e--$4.2

'87e--$4.4

'88e--$4.6

'89e--$4.7 Source: Office of Management and Budget -- 30 --