In the Nation's Interest

Congress Must Cut the Student Debt Burden Falling on All Americans

Total student loan debt has now climbed to a record $1.3 trillion in the United States. The good news is that with the improving economy, default rates have declined over the last four years. Nonetheless, 11 percent of borrowers are in default — which is bad news both for those borrowers and for U.S. taxpayers. Congress should address this when it reauthorizes the Higher Education Act.

Investing entails risk, and investing in education is no exception. When a student borrows to finance a college education, he or she is gambling the investment will pay off in the form of better jobs and higher wages. Because the vast majority of student loans are federally backed, the U.S. taxpayer is gambling alongside them. If a student’s education doesn’t pay off, and they default on the debt, we all suffer. The only stakeholders not financially impacted when students default are the colleges that directly — and immediately — benefit from federal student loan programs.

One way to increase colleges’ stake in their students’ outcomes would be to hold schools more accountable. Specifically, we can require colleges to pay back a percentage of the outstanding debt when their students default on their federally-guaranteed loans.

The idea is that this risk-sharing would incentivize colleges to devote more resources to ensuring that the students who enter their hallowed halls exit with a degree sufficiently valuable that they can pay off their loans. Risk-sharing for student loans has critics, chief among them groups representing community colleges and private universities. But legislation to incorporate the concept into the nation’s federal aid program has garnered bipartisan support.

Various approaches to implementing risk-sharing have been proposed, some more creative and convoluted than others. Policymakers should avoid creating too many carve-outs and exceptions, because the rules governing higher education are already complicated. To the extent feasible, legislation should aim for a simple plan with a payback formula that is generally the same for most institutions. As Purdue University President Mitch Daniels put it, rather than generating 500 pages of regulations, “Charge us a percentage of what the default is. I don’t see why it has to be more complicated.”

One reasonable concern is that risk-sharing might cause colleges to only admit students who are least likely to default. As a result, college access for lower-income students — those who most stand to benefit from additional education — could decrease. This argues for charging different types of institutions — such as community colleges or schools that serve large numbers of low-income students — slightly different rates on their students’ outstanding loan balances, based on the population they serve. But above all, policymakers should try to keep the system simple and the number of rates few.

Applying risk-sharing to student debt makes sense if you believe that institutions should bear more responsibility for ensuring that students’ educational investments translate into real economic gains. The recent chorus for “increased accountability” indicates that most not only believe colleges should be more actively engaged in ensuring students succeed, but should also incur a cost when they do not.

Bipartisan consensus is rare today. Yet congressional leaders and other policymakers agree that we need to hold higher education institutions more accountable for student outcomes, and that we must rein in the $1.3 trillion in student debt before it morphs into a real crisis. Applying risk-sharing to student debt offers a solution backed by principles both parties seem willing to support. As Congress looks to reauthorize the Higher Education Act, it shouldn’t squander a rare opportunity to benefit students and taxpayers.

 

This column was originally featured in The Hill.