The federal student loan program is, in my judgment, the single biggest public policy mistake made in American higher education in the last century. The February 2019 issue of the Review of Financial Studies includes still another detailed empirical study (by David Lucca, Taylor Nadauld, and Karen Shen of the New York Federal Reserve Bank) confirming what former Education Secretary Bill Bennett said in 1987: most of the benefits from federal student loan programs accrue to colleges, not students attending them. Increase subsidized loans to students by $1000, colleges will typically raise their sticker tuition price by about $600. The newest study adds another wrinkle: it appears higher federal assistance also leads to somewhat lower institutional student financial support, so the net tuition growth from increased federal aid might be even greater than the already strong results shown with respect to published tuition fees.
With this in mind, I have long argued (and do in my book Restoring the Promise, out May 1) that we need to reduce or eliminate federal student loan programs and find other ways of financing schooling, such as private income share agreements. But a new development is modestly accelerating the achievement of that goal: some schools are just saying no to student loans, no longer administering federal student loan programs on behalf of their students. For decades a few schools have done this, such as Grove City and Hillsdale colleges. But now it has spread to a number of community colleges.
Several large California community colleges are turning down federal student loan assistance for their students, a requirement under a new free college bill providing one-year free tuition for California community college students. Bruce Baron, chancellor of the large (24,000 students) San Bernardino Community College district, is quoted in Inside Higher Ed: When we had the federal student loan program, we had an extremely high default rate. He added, regarding the use of student loan money, My observation...is if you get a student loan and go to the college bookstore to buy textbooks, you may also walk out with sweatshirts and a few other things. Apparently, that kind of thinking has led many North Carolina schools to also leave the federal system.
Under federal law, if a schools student loan default rate exceeds 30%, it loses eligibility to receive federal funds. Very few schools are at that figure, but some are well above 20%. For years, higher education reformers of many political stripes have urged Congress to require schools to have more skin in the game, meaning they have to share funding the financial shortfall arising from students reneging on repayment of loan obligations. If strong skin in the game legislation were to pass, elite selective admissions schools would feel no impact, but lowly endowed small liberal arts colleges, obscure state universities with mediocre reputations, historically black colleges and universities, and community colleges could face extinctionthey are vulnerable to having to make big payments given the high loan default rates of their students. Many already are in tenuous shape financially even before skin in the game rules.
It may sound cruel and insensitive to the poor since low-income persons disproportionately attend these schools with many high-risk students. Yet too many of them are not graduating, but nonetheless face two burdens: first a crushing financial obligation of repaying loans when their post-schooling income is quite low, and second a sense of failure arising from not achieving their educational goal. We need to help many of these students in ways that are likely to be more successful and less costly, such as sending them to non-degree training for a year or so resulting in a skills certificate qualifying them for very specific jobs such as welding, being a paramedic, or driving a big truck. And perhaps we should finance this training by private income share agreements rather than a failed bureaucratic federal student loan system that is a primary cause of soaring tuition fees.