Student loan debt approaches $1.6 trillion. Yet about one third of current adult student loan borrowers did not even graduate from college. As I said here last week, consultants to the Education Department have calculated that the Feds will lose $435 billion on student loan programsand that is not counting the Biden proposed student loan forgiveness options.
While I think a compelling case can be made to get the federal government completely out of the student loan business, that will not happen soon. A much less radical idea, however, could have tremendous effects in reducing the financial hemorrhaging that comes with these programs: make lending institutions have some skin in the game. If colleges had to absorb a portion of the losses arising from default on student loans, or from a failure to repay the borrowed amount because of loan forgiveness provisions of income repayment plans, they would radically change their approach to admissions and, concurrently, would almost certainly radically reduce taxpayer losses associated with the loan programs.
Currently, institutions eligible to participate in the federal student loan program have every incentive to accept any student wanting admission. Non-selective-admissions colleges struggling for revenues to survive or, sometimes, to make a profit, will take virtually every applicant, and indeed spend a good deal of resources trying to lure students to apply, telling them they can get low-interest federal loans. They know that many of those applying have a very low probability of successfully completing their degree, based on mediocre high school grades, the low quality of the high school attended, poor test scores, etc. Those that are admitted and enroll likely in a few years will be disillusioned, having failed to graduate and gotten a decent job and, worse, having perhaps $25,000 or more in student debt, an amount that grows if the student doesnt work to lower the loan balance.
There are a lot of details that would need to be settled to make skin in the game work, and I admit the devil is in the details. A certain minimal amount of loan default is expected, as huge unexpected events occasionally happen impairing student ability to successfully complete college. Beyond that exemption, it is not clear what the optional amount of skin in the game is, whether it is, say, 10% or 50% of the ultimate loss associated with default.
Critics might say colleges are in dire financial straits already; this would force many of them out of business. That is no doubt true, and while it might be sad for some individuals and university communities, it might be actually be good for society, reducing over-investment in higher education and reallocating resources to more productive needs. Creative destruction is a beneficial process that has served to keep American capitalism innovative and efficient. More of it is needed in higher education.
Currently a large portion of college graduates hold jobs traditionally held by those with far less expensive high school educations. A majority of full-time college students either fail to graduate or take longer than the advertised four years for a bachelors degree. For many, short-term (one- or two-year) postsecondary schooling in very specific vocational skills makes more sense than pursuing a four -ear degree including some relatively academically challenging courses not directly applicable to the real world.
There are ways skin in the game rules could less clearly disadvantage struggling colleges, including historically black colleges and universities (HBCUs). A school with almost no endowment and low spending per student could be asked to absorb 10% of the losses associated with student loan defaults while a somewhat better off school could be asked to absorb morea progressive penalty. I am not wild about that approach, but if it would promote adoption of skin in the game it might be a reasonable price to pay.
If federal political control is divided next year (likely if Republicans win one or both of the Senate elections in Georgia on January 5), I could see skin in the game being introduced into a compromise bipartisan higher education bill. Unfortunately, partisan politics may triumph over efforts to control wasting taxpayers money, but that is nothing new in our nations capital.