My pal Douglas Webber, an economist at Temple University, recently testified before the Senate HELP committee — along with AEI’s Andrew Kelly — on institutional risk-sharing. Dr. Webber is out this week with a more digestible op-ed in the Chronicle of Higher Education.
National student-loan debt is $1.3 trillion, and delinquency rates on student loans are roughly equal to those on subprime mortgages before the great recession. Given these grim statistics, policy makers are increasingly asking whether colleges should shoulder some of the financial burden, which now falls only on the taxpayer.
As I told the U.S. Senate Committee on Health, Education, Labor, and Pensions during testimony last month concerning the reauthorization of the Higher Education Act, it is in the best interest of students, taxpayers, and the economy that colleges have “skin in the game” when it comes to their students’ future economic success. The most straightforward way of doing this would be to impose a penalty on colleges equal to some proportion (e.g. 20 percent) of the value of the student loans that past students have defaulted on.
Webber is clear that the point of risk-sharing isn’t the penalty.
The benefit of risk-sharing lies not in the penalty itself, but in the changes in decision-making that it promises. As a general rule, any policy aimed at improving graduation rates, time to degree, debt, or earnings or employment after graduation would have an incentive under a risk-sharing policy. For example, a 2013 report by Complete College America found that the average associate-degree program offered at two-year institutions required 65 credits, with many programs requiring over 70 credits. This growth in required credits substantially departs from the historical norm of 60.