Student Loan Bubble
Colleges Need Skin in the Game

Republicans and Democrats have offered two distinct approaches to the student loan crisis. GOP lawmakers have proposed introducing more competition in the higher education sector by breaking the federal monopoly on college accreditation, with the idea that this could shake up the market and lower costs. Democrats have focused on expanding federal subsidies, either by forgiving and refinancing loans, or, in the case of Bernie Sanders, by eliminating tuition altogether.

We generally think the GOP approach is closer to the mark. Colleges really are saddled with regulatory costs, and the cartel-like accreditation process blocks innovative new higher education models from emerging. Meanwhile, further greasing the student loan spigot is likely to drive up tuition even further, and give more relief to upper-middle class students than to poor ones.

But Democrats and Republicans alike ought to be able to agree on a third approach to reducing student loan default rates: Forcing colleges to take on some of the risk associated with their students’ borrowing. As Max Eden argues in a new Manhattan Institute report:

Real higher-education reform wouldn’t regulate and reward by tax status; it would realign the incentives of all schools to better serve students. Colleges, public or private, nonprofit or for-profit, should have skin in the game on loan repayment; if students can’t pay back their loans, the school should be on the hook for a portion of the unpaid balance. Even a small amount of risk would give postsecondary institutions a reason to contain their costs and offer a better education. A bonus for colleges that educate low-income students who pay off their loans could offer postsecondary institutions an incentive to expand their offerings with an eye toward equity.

To be sure, a number of specifics need to be hammered out—most importantly, the share of student loan debt colleges would be accountable for. But it’s easy to see how a version of this proposal could win backers on both sides of the aisle. For Democrats, the policy gives debt relief to students in default. For Republicans, it would help slow the growth of tuition without draining federal coffers. It would also be an important complement to their more ambitious goal of deregulating the higher education sector, as forcing colleges to share risk with their students would help dis-incentivize Trump University-style scams.

Thanks to misguided federal loan and accreditation policies, low-quality colleges have increasingly been able to get fat at the federal government’s expense without giving students the skills they need to make their education worth it. Time to force colleges to put some of their own money down on this risky operation.

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