University of Virginia Library

Ford Foundation Recommends
Modified Student Loan Plan

By GEORGE LYONS

To expand the total
financial aid available to
students, colleges and
universities should consider
adopting a modified
"pay-as-you-earn" (PAYE)
plan tied to the Federal
Guaranteed Student Loan
Program, a Ford Foundation
task force suggested in a report
published yesterday.

According to the report,
PAYE is a relatively new
concept in lending.

"Unlike a conventional
loan, which obligates the
borrower to a fixed schedule of
payments, a PAYE loan
obligates the borrower to some
per cent of future annual
income, with upper limits on
the repayment period and the
total repayment liability," the
report said.

Thus, a PAYE loan
distributes payments over a
period of time (ten years or
more) and in accord with the
student's ability to pay.

Recommends Schedule

The report primarily
recommends a fixed schedule
of repayment following
graduation that would increase
in accord with the expected
growth of the graduate's
income and a guarantee by the
college or university to absorb
any loss from students whose
incomes fail to grow in accord
with the plan's assumption.

D. Bruce Johnstone,
executive assistant to the
president of the University of
Pennsylvania, and Stephen P.
Dresch, an economist with the
National Bureau of Economic
Research.

'Hybrid' Plans Differ

The modified or "hybrid"
PAYE plan recommended by
the task force differs from the
conventional PAYE concept.
The modified plan does not
distribute payments precisely
in accord with incomes but
distributes according to a fixed
graduated schedule rising with
the expected growth in future
earnings of the average
borrower.

Graduates whose incomes
do not increase in accord with
the plan would be able to defer
the unpaid portion annually,
arriving at the end of the
repayment period with an
outstanding debt which would
be forgiven and absorbed by
the college.

Assumption Recommended

For the long term, the
authors recommend
governmental assumption for
forgiving some portion of
payments in the event of low
student earnings.

Few institutions have
sufficient liquid assets to
capitalize any large-scale loan
program, according to the
report.

Plans Available

Income contingent or
hybrid plans can become
generally available only
through direct governmental
capitalization, as in the
National Defense Student Loan
Plan, or through state or
federal assumption of the
capital risk, as in the state and
federal insured loan programs.

Yale, Duke Plans

Currently only Yale and
Duke have instituted fully
income-contingent plans.
Harvard this fall will begin a
hybrid plan similar to the one
proposed in the Ford
Foundation report.