Should Colleges Share in Student Loan Risk?

By Patrick Coate, PhD

In my recent AIER article on student debt, I discussed proposed incentives to encourage colleges to spend more resources on retaining rather than recruiting students. Last week, Doug Webber of Temple University discussed one of these proposals in detail for FiveThirtyEight.

The suggestion is for colleges to pay a portion of their students’ loan default. As Webber points out, this solution, risk sharing, has already gained some political traction. The premise is that colleges are certainly in a better position than the federal government to evaluate their applicants and to help already-enrolled students succeed. Colleges often may even have more accurate estimates of how likely students are to succeed than the students themselves.

What I find most appealing about the risk-sharing idea is that it addresses several different types of potential concerns with the current system. The most obvious is outright fraud. In the last year, regulators took action against for-profit colleges ITT Tech and Corinthian Colleges. Tuition paid using federal aid dollars was the lifeblood of these institutions, and former students alleged that colleges misrepresented costs and future outcomes in order to get them to take on these loans—and some have accused the schools of signing paperwork for them. With risk sharing, it isn’t as difficult or critical to police fraud because colleges would not be able to get by without being able to place their students in jobs that enable them to pay off student debts.

Colleges’ benign incentive wouldn’t be limited to fraud or for-profit colleges. With risk sharing, colleges would be likely to admit fewer students but invest more in the ones they have. A number of traditional colleges have extremely high admission rates and low graduation rates. Even among graduates, many are underemployed in the present labor market. And many graduate programs, such as law schools, train many more students than can be placed in the job market. While students themselves are responsible for making good decisions, they can perhaps be forgiven for optimism about their future prospects if they find acceptance letters and loans readily available.

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