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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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  • Tom

    The Dems won’t do it. Might threaten their base

    • Jim__L

      Bernie is pandering to his base when he advocates “free college” — the theory- and ideology-driven young’uns who have no concept of the practical principles it actually takes to make an economy run.

  • qet

    Another necessary component of reform: the federal government will no longer provide grants, loans or loan guarantees to any student attending any college whose administrator-to-faculty ratio is greater than 1:4.

  • Proud Skeptic

    While I agree that something needs to be done here, I would bet the farm on colleges not being able to rise to the challenge of having “skin in the game”. They wouldn’t know where to begin. They would have no clue what they could do. There would be committees and conferences but the understanding they may once have had of what really prepares a student for the work world is long gone and it is unreasonable to expect that they could somehow revive it.

  • johngbarker

    I offer two more basic questions. What is the value of a college education? Is there a more efficient and effective way of achieving this value?

    • Jim__L

      Some of the more famous hackers out there definitely have their own ideas on this score. =)

  • solstice

    The federal government created the higher education bubble through its easy money programs, and the system itself–with its bloated bureaucracies, uncontrolled costs, political correctness, mediocre programs, and ill-educated, pampered students–is rotten to the core. If this bubble popped, it would represent a necessary market correction and would therefore be a good thing. And if any sector of American society deserves to suffer severe financial pain, it is this sector.

  • Frank Natoli

    Who are the REAL beneficiaries of student loans? That would be the college teachers and administrators. They are the ones who actually get the money, whether the students graduate in a major that has any job opportunities or not. Let the college teachers and administrators be solely responsible for the financing.

  • FriendlyGoat

    “Hammering out details” after having a pipe dream is always a real bummer. When you make colleges responsible for unpaid balances on student loans, the supposedly dumb-as-a-post colleges will surprise you with all kinds of innovation preventing themselves from being put on that hook. Most of it will be in the student selection process—–and in fine print disclaimers students will sign indemnifying the colleges for any liability caused by the student.

    • Ofer Imanuel

      Easy to solve. Make it illegal, as other things are. Any contract a student signs to that effect will not be enforceable at court

  • GS

    As long as the colleges have to operate under the burden of “civil rights” mandates and doctrines [such as “disparate impact”], they are doomed to epic waste and ultimate failure. If and when they are allowed to become strongly and explicitly IQ-selective, and adjust their curricula accordingly, then, and only then, would it become possible to speak of correcting the course.

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