Bill Clinton photo

Press Briefing by Deputy Secretary of Education Madeleine Kunin and Deputy Assistant to the President for Economic Policy Gene Sperling

October 21, 1994

The Briefing Room

11:06 A.M. EDT

DEPUTY SECRETARY KUNIN: Good morning. I'm pleased to announce the Individual Education Account Program. And the fundamental premise here is that the American Dream is really realized through education. And yesterday the President announced and signed the Elementary and Secondary Education Act, which is one step of that educational opportunity to fulfill the American Dream. Today we know that access to higher education is fundamental to being able to earn a decent living and to live a good life and support a family.

Now, there are two ways that this initiative -- that was passed by the Congress and was signed in 1993, in August -- there are two ways that the implementation of this initiative is going to have a profound effect on students and families around this country. One is the process of applying for loans is vastly simplified for students, for families, for schools under the direct lending program. And the preliminary reviews on direct lending have been totally favorable. Money has been saved. Paperwork has been saved. Confusion has been avoided.

And as many of you may recall, that program is to be phased in with the first five percent already in place -- first five percent of student loan volume -- and some 104 schools are now participating in that program and are truly satisfied customers. And both Secretary Riley and I visited a number of schools and can testify that it's a rare occasion to see a happy financial aid officer, but, in fact, they are smiling as they never have before, because their work has been eased, and of course, the students are very pleased.

But the process of applying is one part of the equation. But the process of paying back is equally important, because the student realizes, needless to say, that this could be a burden -- a lifetime burden as to how you deal with your student loan. And as more and more students are, in fact, borrowing, and they're borrowing greater and greater amounts, what the President's initiative really is designed to do is not to make this barrier prohibitive so that somebody says, I can't afford it; I can't deal with it; I can't be burdened for the rest of my life with an overwhelming student loan debt.

So the new education account and the pay as you can plan, which is really income contingency, enables students to really adjust the way they pay according to their earnings. And when you're earning less, if you want to take a job in teaching, for example, you can pay less. When you're earning more at a later stage of your life, you pay more. But the advantage, of course, is that, one, it encourages you to go to college in the first place; and, two, it changes your job options so that you can, in fact, fulfill your dream of what you want to do.

And you will see in your packet a variety of examples of how this can affect students. There are also other options for students -- repayment plans. There is the extended repayment plan and there's the graduated repayment plan. But at the moment most students use the standard repayment plan. And the difference between the pay as you can plan and the standard one is that regardless of your income, in the standard plan, you pay a certain amount over a period of 10 years whether you're making $50,000 a year or $20,000 a year. And that is very difficult as a percentage of your income.

Now, the other major point to stress this morning is that this reform program of the whole student loan program has, in fact, proven to be a very, very successful reinvention story. The numbers are very powerful in this case. The taxpayers over five years will save $4.3 billion. And students over five years, through reductions in fees and some reductions in interest rates, will save $2 billion over five years. So this process of coming up with a new form of how you apply and process the loan, how you manage the loan throughout its lifetime, and how you pay back the loan will open up the doors to higher education for those students who still are not sure whether this is a real choice for them. Those who have parents who are well-informed, those who have guidance counselors who are well-informed have made those decisions. But there is a great, enormous untapped potential of students that have not, that are still in doubt.

And over the next year we wanted to make sure that everybody knows about this program, about the individual education account. So we're going to inform guidance counselors about the fact, so that no matter where you go to school, how crowded it is, what neighborhood it's in, whether your parents have ever gone to college or not, you will have a chance to find out about it.

We're going to run video conference training sessions for student financial aid officers. And current borrowers will get information about this new program in their future billings. There are two ways, let me just add, that you can become part of the contingency pay as you can plan. One is if your school already is enrolled in direct lending; and, two, you can apply to consolidate your loans. And the President has asked Secretary Riley to come up with a plan for consolidation in January so that is done in an orderly and effective manner.

Let me just close my opening remarks by stressing how significant this truly is for America's young people. Access to education, the American Dream have almost become cliches so that we sort of shrug and say, well, that's really kind of a worn-out theme. But I can tell you, when I was thinking about going to college, and it was a while ago; it was in 1956 -- actually it was in 1952 that I started college -- the difference between whether I would go to college or not was the fact that I received $100 scholarship from a local merchants association. There were no loans, or grants, from the federal government. I did not contemplate whether I should go to law school because that was simply out of the realm of possibility. We couldn't afford it.

We are in a very new era today where, in fact, all students do have the choice, do have the opportunity of obtaining the loan and of obtaining the chance to pay it back in a way that they will not default, that they can pay back as a percentage of their income. This is really an extraordinary expansion of opportunity for America's young people -- the major change since 1973 when the Pell program was first started. So the President's initiative, Secretary Riley's initiative, I think will change students lives as much as that $100 scholarship changed mine some years ago.

I'd be happy to answer questions.

Gene, would you like to add something?

MR. SPERLING: I just wanted to stress, I was the economic policy director during the campaign, and as many of you know, the President, then Governor -- one of the main things he used to say about college education was that he wanted people to have the ability to borrow for college and to be able to pay back either through national service, or through a new option that would allow them to pay back a percentage of their future income. I think passage of the AmeriCorps National Service filled half of that. Today, as we announce the individual education accounts, I think he is clearly fulfilling the other half.

What is even more impressive about the program that we have now, even maybe more impressive than we envisioned in the campaign, is the way that when you borrow from this account -- from the individual education account -- you not only have this new option of income contingent loans, or pay as you can loans, but you also keep your past options of the standard tenure loan, and two other forms to let you pay back over a longer period of time. And then, you can switch back and forth at any time that you want in your life, so that it gives the borrower the maximum flexibility.

And what the President used to often say was that he never wanted student loans, or the way you pay back student loans, to stand in the way of anybody fulfilling their dream. Now, when you get a college loan and you have to pay back a large, fixed amount in your first few years, it's rather hard to be an entrepreneur who goes out and says, I may not make much money for one or two years, but I want to start a business. This is a program that would allow you to fulfill that dream because you would pay back a small percentage when your earnings were low, and pay back more when your earnings were higher. The same for somebody who would choose community service early in their life, or even for their whole life. The same for a family that has two workers, but decides to have one worker stay at home for a period of time to take care of a sick relative, or raise a child. Their income may go down temporarily, but then so would the amount of their loans.

So I think that it's very exciting. As the Deputy Secretary says, this really is a reinventing government proposal, whereby taking out the middle man and fulfilling this vision of the President, you're not only saving money for the federal government, you're not only saving money for students through lower fees, but you're also improving it from the use of the customer, the borrower, who now has more flexibility. What we're doing in a sense, is giving students the kind of flexibility that borrowers for houses have now had, and other things that may be less important to a person's future income -- the flexibility to pay back in different ways.

We believe that people know best what's best for their life. As the President says, people change jobs six, seven time over a lifetime. They have to be both workers and families. This gives them the choice to have their repayment plan fit their needs.

I think this also really is very much a defining -- this is a defining element of what the coming election is really about and whether we're going to go forward or backwards in giving people the opportunity to success in the new economy.

It is interesting that if you look at the House Republican contract, that over seven years they have over $1.5 trillion in unfunded promises. And when people challenge them to at least give a list of how they might pay for it, they came up with about 10 percent of what they would need to pay for their plan. Ten percent -- about $176 billion of suggested cuts. And yet, even in that small amount, one of the ones they chose, that they wrote explicitly down, was to completely eliminate the subsidy for all students while they are in college.

Currently, three million students a year, who need it -- who are in need of assistance, who get what's called the Subsidized Stafford Loans, are able to get this in-school subsidy so that their loans do not build up substantially while they are in college. This has been part of the student loan program since the National Defense Act in 1958. And it's striking that as they are proposing things like a capital gains tax cut, that the joint tax somebody estimated would cost $208 billion, 72 percent of which would go to people making over $100,000. So one of the ways they would choose to pay for just a small part of that is to cut in-school interest subsidies for three million students per year. Now, this is their print --it's their fine ink.

And again, I think that we're very happy. The President is fulfilling this vision -- it will make a difference in millions and millions of people's lives. But it does require that we continue this momentum and going forward on this vision of empowering people with more education for the future, and not stepping back to that type of proposal and those type of priorities.

We'd be happy to take questions.

Q: You just brought up the political angle of this, and I guess my question is, why -- there seems to be a heavy political element in bringing this up at this time. Wasn't this introduced, I guess, back in August or so, and why are we hearing about it now? Has something changed? What is the reason?

MR. SPERLING: I'll brief for a second and let the Deputy Secretary speak. This passed as part of the economic growth plan Omnibus Reconciliation Act. Then there had to be a period of time in which it was implemented and went through the regulation. In July, that was the initial point where the first regulations came in. But what we wanted to do was wait until we had started the program up. We have -- 300,000 people are currently in the program; next year, 1,500 schools -- over 1,500 schools. And we felt that now in the school season -- and quite honestly, after health care was not really dominating the domestic agenda, this is something we want to push.

I think if you looked in almost every speech the President has given, he has mentioned this. But one of the things we've always wanted to was we've always felt that no matter what we did in the student loan program, it wasn't going to help anybody if anybody didn't know about it. So, by creating an individual education account and -- I think the proof will be in the pudding.

What you will see is that this will be an effort to promote this, not just now, but after the election; not just in front of reporters, but with high school guidance counselors in every school across the country. And this is something the President believes very, very deeply in. This is something he has always talked about and always pushed. And we want people across the country to know about it. Because that is the only way they will make these opportunities and get educated and be part of the work force that is benefitting in the global economy now.

DEPUTY SECRETARY KUNIN: Just let me add something to that. I mean, many federal programs that get passed, but if the public doesn't know about them, there's no way they can take advantage of the opportunity. And this is really the first time that we have begun to inform families, students, communities on a large scale of this kind of opportunity that is available to them. And I will also announce the phone number that students and families can call: 1-800-4-FEDAID.

And it's really important that young people, that parents are knowledgeable about this opportunity. And I think there is a clear contrast in the direction that we're moving in and that, in fact, greater access to college education, to technical education, to community college, whatever your choice is, is something that this President and this administration squarely stands for.

Q: But you wouldn't -- I mean, you brought up -- you wouldn't deny that there are some political overtones and objectives -- would you not deny that?

MR. SPERLING: I would say that the main reason for announcing now is that it has now been -- you're talking about we could have announced it a couple of months earlier. To have announced it in the summer before a single school had got going did not make much sense. And, yes, we wanted to announce this not in the middle of the health care debate and at a time when people would focus on this. We think it's very important. And I think if we had announced it on July 1st, I think we would have properly been -- been properly criticized for rolling it out at a time when the attention was elsewhere, before a single school had started up. And this is going to be a long-term effort, hopefully not just of this administration, but future administrations, to not only improve the college loan program but to make sure more Americans know about it.

So announcing this program is not political at all. When I mention the contrast with that and the contract, yes, I am making a point about the different priorities of different people who are contesting for the support of Americans. And that is a point we are making. But the overall program is something that has been in the works for a long time, something the President has deeply believed in, and there has been a long-term effort. There has never been a break in working on and promoting this program.

DEPUTY SECRETARY KUNIN: Let me just say also, the timing is important because we haven't been in a position before to really assess the first phase of direct lending. But now the loans are, in fact, being made and have been made under direct lending. So the first five percent, we have a verdict from the jury, which we didn't have before in regard to how successful the program. And I think that's an important piece of news.

Just to put it in perspective, as many of you here recall, when we first proposed direct lending and student loan reform, there were a lot of skeptics out there who said, you know, one, the Department of Education couldn't manage it; two, it would be confusing; and it turns out to be just the opposite. In fact, this has been a stunning management success, and, in fact, the savings and the satisfaction are very real.

Q: Then, just to clarify, is there anything specifically new that you are announcing, other than, let's say, the name for it today, or is it basically the program that was introduced back in August?

DEPUTY SECRETARY KUNIN: The name is certainly new, and I think the availability to students that income contingency is potentially available over the next five years to 20 million students -- and I don't believe that has been announced in quite this way -- this could be a savings for all the students that have outstanding loans if they choose to do so. Now, not everybody will. Many will stay with the standard loan program, some may choose other kinds of programs, and we're going to be very conscientious about really describing those options objectively. You do pay more in interest rates over the long term if you extend your loan; there's no question about that. But the fact that this is available to everyone puts it on a scale that I think has not been announced before.

MR. SPERLING: I think the most important thing is that this is new to the American public. There has been a lot of discussion of the institutional arrangements and the legislative battle over direct lending, but that is not what this is about, ultimately. This is about whether the millions of students out there know from us and from you what their new opportunities are.

And I would say that there has been very little so far that describes to an average student, an average family, what the United States Congress has just passed, and how it will benefit them and how it will give them flexibility. And we wanted to roll this out at a time when we felt people -- in the fall, when people would focus on it, and whether one covers the political aspects or angles of it is really not important.

What is important is that, from our point of view, that we -- and we hope you as well -- will let people know what the opportunities are available to them. Because if they are not transmitted from us to the media, to average people, then we will have a huge opportunity lost. We will have created a great new flexibility for over 20 million people over the next few years to borrow in a way that better fits their individual needs, and nobody will know about it.

So what I'd stress is that we just want to let people know what the opportunities are, however you report it.

Q: As you know, a lot of college and student and consumer groups have expressed some reservations about the way that the income contingent option is structured, because students whose payments are too low will have interest to capitalize on top of the principal, and their total repayment over years could grow by thousands of dollars. What kind of requirements are you building into the program to make sure that students have enough information up front to fully understand the significance of that decision.

DEPUTY SECRETARY KUNIN: Yes. We are very conscious of the need to provide truth in lending in the true spirit of that phrase. And students will receive counseling as to what is best for them, they will receive all the information about the long-term costs in addition to the short-term costs, but we're also really working under the assumption that these are adults who have to make lots of financial choices and decisions in their lives.

Remember, we're talking about the student who is paying back a loan. You have to make the decision of how you pay it back when you take it out; it's only when you graduate and you complete your program. So a lot of these students will be 22, 23, 25 years old. They're also making financial decisions on whether or not to buy a house or a car. And having to make those choices as to what option is available. And one size does not fit all. For some students, the traditional plan, the standards plan will continue to be the most effective. And the important word here is choice. The important word is that students will, in fact, be able to choose what is best for them at their particular point in life.

And, as these different options in your packet indicate, for example, a recent college graduate who is earning $25,000 and owes $10,000 in student loans, under a regular plan they would pay $120 each month. Under income contingent they would pay $105 and extend it over 12 years. We calculated as kind of a generic payment plan which -- there are many variables for all of these. If you had a $12,000 loan under the standard plan, you'd pay 130 percent back. Under income contingency plan, you'd pay 150 percent back over a longer period of 16 years. And the difference is not so much as to be totally destabilizing for someone. The difference would be $16,000 over 10 years, versus $18,000 over 16 years.

So, yes, there are differences. That kind of difference will be fully explained. But we believe students are capable of making those kinds of choices just as they do in other things in life.

MR. SPERLING: I just wanted to add to that sometimes the extreme examples are when people don't even adjust back for inflation the amounts of money over time. When you look at the real time value of money, it's up to the individual person whether they will or won't be better off. It depends what else they feel they could do with those resources. But the important point is, we tell people that they have the intelligence and the free will and that they know themselves well enough to know how they should spread out their loans on a car. We think people should have the choice between a 15- or a 30-year mortgage. We think that people who go to college, and graduate from college should have the same flexibility and that the federal government should trust that they have the same right to choice, to make those same decisions in student loans.

And, in fact, you would argue that they have more choice here because they're never boxed in. The thing that you have to remember is that you can always switch back and forth. If you did think you made the wrong decision repayment-wise when you were a freshman in college, you could change without any cost as you started your repayments, or after two years. So when you're giving people absolute, maximum choice and flexibility to switch back and forth, I can't say that we think the federal government should come in and mandate for each person what is the right choice for each and every person at each and every point in their life.

DEPUTY SECRETARY KUNIN: Let me just make one more comment on that. This is probably the best investment any student or family could make. All the evidence indicates that the difference between having a college degree and having a high school degree for lifetime earnings is $1 million. The difference for graduate degree is $3 million. So, while yes, this provides more choice and a different repayment plan, the bottom line -- this provides more opportunity, more access, and for the long-term, economic well-being of our young people. And that is what is the heart of this initiative.

Thank you.

Q: How many people will be involved overall when it's finally phased in fully?

DEPUTY SECRETARY KERNIN: We cannot fully -- the direct lending depends upon how many people, how many schools do participate. And the Congress designed the law so it's phased in five percent, 40 percent, 50 percent and then as much as -- it can go beyond 50 percent if more schools apply, and then 60 percent. So our expectation is that we will have full participation in direct lending.

Income contingency -- you can ask for that even if your school is not in direct lending after the plan for that is rolled out in January. We don't know at this point what percentage will apply for income contingency.

Q: Have there been any shortage of participation because there hasn't been attention given to it by the White House before?

DEPUTY SECRETARY KUNIN: No, actually we're very pleased with the participation. And we anticipate that we will reach the 40 percent of the loan volume this year as the law permits.

Q: My understanding is, isn't there an incomesensitive -type plan within the current loan program?


Q: So how is this -- how is your thing better?

DEPUTY SECRETARY KUNIN: This is better because, one, you can switch anytime, you don't have to negotiate with your lender or guarantee agency. And it's just very clearly prescribed. And not everybody provides the income-sensitive loans. And this is just another option. Some people may want to choose different ones.

MR. SPERLING: The main point which Leo could discuss with you is that before it was a one-on-one thing; this is a universal guarantee to anybody who is in the program. So it's a vast, vast, vast expansion in terms of the ability and in terms of the general numbers of people. It's 300,000 already by -- in the direct loan, by Fiscal Year '98. It depends how many schools come in, but one estimate on the phase-in would be close to $5 million with another 15 to 20 million people in consolidation who could be eligible.

The only thing I want to stress is that the Secretary of Education is going to announce how that will be phased in in January, because with so many people out there, it's extremely important that it be set up in a way that we can manage the caseload and that it be done in an efficient and prudent way. And we're going to work with members of Congress to make sure we have a plan. But when you look four or five years out, you're talking about over 20 million people being potentially eligible for this.

Q: So if I'm a student with back loans or whatever, and if I want to consolidate in January, then, boom, my loans can go from eight percent to four percent? Is that true?

DEPUTY SECRETARY KUNIN: Well, the couple of -- yes, you can inquire about it. We are going to reveal the plan to implement it. But certainly that potentially -- maybe not to four percent; the present rate is 7.4 percent --

MR. SPERLING: The four percent is the fee. The fees go down four percent. That is already for everybody. So that already exists right now for every student.

Q: But where do the students --

DEPUTY SECRETARY KUNIN: It depends what your average interest rate is for --

Q: I'm just say for a student, for a student? How are the fees going to save them --

MR. SPERLING: The $2 billion is the savings from the fact that the fees used to be 8 percent -- 6.5 percent, now they're 4 percent. So that is where the $2 billion savings comes over five years. And there could be people who get additional savings well beyond that $2 billion from lower interest rates, but that depends on the individual person and when they got their initial loans.

DEPUTY SECRETARY KUNIN: A rough estimate we have is about 40 percent of the students have loans that are over 8.25 percent, so that if they consolidate, they would have a lower percentage on average. But I would -- it's very hard to say what applies to all students. What is very important here is that there, in fact, be counseling, be information, because it's going to be very individualized, depending what the various interest rates were when you took out your student loan. But the possibility, the potential is very strong that a number of students will experience savings. But as Gene Sperling just said, we want to make sure we implement this in a way that is manageable and that works effectively for students, their families, and fulfills the promise of the program.

So I'll give you more details in January, and I would really like to wait until then.

Q: Would there be consolidation, then they're eligible for all five payments plans?


Q: Just like the direct loan?

DEPUTY SECRETARY KUNIN: Yes. The only way you're eligible for direct loans is either if your school is in the program or you consolidate.

MR. SPERLING: The only thing I just want to stress is in January they'll announce the plan that could have some phasing in. So I wouldn't want you to say that everybody will absolutely on that date. They'll announce how, but it will be phased in for everybody in January.

THE PRESS: Thank you.

END 11:40 A.M. EDT

William J. Clinton, Press Briefing by Deputy Secretary of Education Madeleine Kunin and Deputy Assistant to the President for Economic Policy Gene Sperling Online by Gerhard Peters and John T. Woolley, The American Presidency Project

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