Don’t Let Colleges Keep Ducking Accountability on Student Loans

Most of the problems with student loans are due to a misalignment of incentives. There are three parties to a student loan: the student, the lender—meaning the federal government because we use a government-as-lender system—and the college. A good student loan system would align the incentives so that no party can benefit by making the others worse off. Unfortunately, our current student loan system does not do this.

In particular, it is distressingly common for a student to take out a loan that turns out to be a bad investment. This has negative consequences for the student, including wasted years, wage garnishment, and lowered credit scores. It also has negative consequences for the government, which is never repaid the money it lent. But while both the student and the government are hurt by such loans, the college benefits because they get paid up front and they get to keep all the money. This misalignment of incentives, in which colleges can benefit from loans that leave the student and the government worse off, leads to massive problems with student loans, including over-indebtedness for some students, wasteful spending by colleges, and massive government losses from the student loan programs.

The most straightforward solution to these problems is to align incentives so that colleges only benefit from a loan when the student and the government benefit too. This idea goes by various names like skin in the game or risk sharing, but the common thread is to eliminate the misalignment of incentives. There is bipartisan support for this principle (see for example, the proposals collected by the Center for American Progress from across the ideological spectrum). But given the recent election results, the most likely vehicle to introduce risk sharing is the College Cost Reduction Act (CCRA) put forward by House Republicans.

The CCRA contains many provisions, but the key financing provisions are the introduction of a risk-sharing payment and the creation of Promise grants. The risk-sharing provision would charge colleges for a portion of government losses on a loan when the student fails to repay in full. The Promise grant portion would give extra funding to colleges that increase their students’ earnings by more than the student paid to attend the college.

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This would result in dramatically better incentives for colleges. Instead of being rewarded for enrolling any student in any major, colleges would now be rewarded for increasing their completion rates, charging lower tuition and/or reducing time to degree, enrolling more students in high-demand majors, and enrolling more students from low-income families. Some colleges are already doing a better job at this than others, and the rest would be incentivized to mimic them.

Consider how this would play out among the five largest public traditional colleges. Penn State would lose $11 million, Texas A&M would gain $7 million, Ohio State would lose $8 million, University of Central Florida would gain $33 million, and the University of Illinois Urbana-Champaign would lose $2 million.

While the colleges that gain will naturally be happy, I want to emphasize two things about the losses for the colleges that would lose money.

First, the losses for colleges are small. The $11 million loss for Penn State, the $8 million loss for Ohio State, and the $2 million loss for Illinois all amount to just 0.1% of each of their total revenue. These losses would be easy to make up for. For example, Ohio State spends $20 million a year on “diversity, equity, and inclusion” (DEI) administrators, which means their $8 million loss could be paid for by cutting the DEI budget by just 40 percent. Assuming the same cost per DEI administrator for Penn State and Illinois as at Ohio State, Penn state could cover their $11 million payment by cutting their DEI budget by 98 percent, and Illinois could cover their $2 million payment by cutting their DEI budget by 16 percent.

Second, these financial effects are static, meaning they assume the colleges don’t change anything. But one of the main purposes of implementing a risk sharing program is to change college incentives with the expectation that this will then change college behavior. Since the risk sharing payments are assessed at the program level, one of the main behavioral changes would be shuffling resources among programs within a college as low-performing programs are reformed or closed and successful programs are expanded.

For example, Penn State could cut their risk sharing payments by 25 percent just by eliminating its professional law degree, which saddles students with too much debt. It could cut the payment in half by also eliminating three low-performing master’s degrees—human resources, English, and student counseling—and three low-performing bachelor’s degrees—psychology, human development, and criminal justice. Those resources could then be used to expand Penn State’s successful nursing, engineering, and MBA programs, all of which have $0 risk-sharing payments because those graduates see a big boost to earnings relative to the cost of the program.

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At Ohio State, eliminating just eight low-performing graduate programs would reduce the college’s risk sharing payment by almost 70 percent. These resources could then be used to expand the college’s successful bachelor’s degree programs in business, real estate, nursing, and engineering. But OSU also illustrates another way colleges could respond. One of the low performing programs was a professional degree in dentistry which would account for about three percent of OSU’s risk sharing payment. Graduates from the OSU dental program get good jobs, earning an additional $128,000 over four years after graduating. The problem is that OSU charges an arm and leg for the program, almost $200,000. As a result, the typical borrower in this program leaves with almost $240,000 in student loans. Thus, rather than close the Dentistry program, OSU could just lower the price of the program.

At Illinois, almost one third of the college’s risk sharing payment is due to a single program, the master’s degree in social work. Graduates from this program see little change in their earnings but take on an average of more than $52,000 in debt. Eliminating that program, and a master’s degree program in library science and administration would cut Illinois’ risk sharing payments in half. Those resources could then be used to expand the successful master’s degree programs in animal sciences and community and regional planning.

It is natural that colleges resist being held accountable.

Colleges have grown accustomed to getting massive checks from taxpayers and facing no accountability for how they use it. But that doesn’t mean we should listen to colleges’ pleas to avoid accountability and continue to send them money with no strings attached. Risk sharing is an ideal string to attach to taxpayer funding. Risk sharing would benefit students—by reducing college costs and lowering debt— and taxpayers—by reducing the losses on student loans that go bad. I would even argue that risk sharing would benefit colleges in the long term because as low-performing programs are closed and resources are reallocated to establish or expand high-performing programs, colleges will be a more appealing option for students, and colleges can make a stronger case to legislators about the value they create for society.

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