Should Colleges Pay for Student Loan Defaults?

Details of a New Plan to Hold Colleges Accountable

Should Colleges Pay for Student Loan Defaults?
August 20, 2015

A college education does not come with a warranty. All a degree does for you, at least in theory, is open more doors of opportunity — it does not guarantee that you will get a job in your field.

However, college costs have risen sharply — over 1,100% since 1978, which is more than four times the cost increases in the Consumer Price Index (CPI). As a result, too many graduates are dealing with onerous levels of student debt, making repayment difficult if they do find a job in their chosen profession and nearly impossible if they do not.

With a tight job market and lower wages, college costs are reaching a critical mass. At what point do shrinking job opportunities make a college education not worth the costs? In the worst case scenario, continued price increases will eventually drive costs so high that graduates in critical but lower-paying jobs, such as teaching, will be unable to pay off the debts necessary to acquire their degree — and if they can, it will be at the expense of home ownership and other necessary economic drivers.

While it is unrealistic for colleges to guarantee a job to their graduates, it is reasonable to expect colleges to consider cost control measures to make their degrees more affordable. Unfortunately, there is little economic incentive for colleges to control costs while the demand for a college education stays high.

Federal and state funding has been trimmed in recent years, but the combined input from state funding and Pell Grants is still over $115 billion annually — providing a large pool of money to colleges to help sustain higher spending.

Various legislative proposals have been floated to give colleges a financial stake in the future success of their students. One interesting proposal with bipartisan support in Washington is to force colleges to pay for excessive levels of student default.

In a way, this rule already exists within the Department of Education. If over 30% of graduates from any school default on their loans within three years after starting the repayment period, that school can be thrown out of federal loan programs. Even with this low bar, a few schools have still managed to miss the goal but are generally given a second chance.

Newer proposals to rectify the situation may be similar to the bill introduced by Sen. Elizabeth Warren (D-MA) and Sen. Jack Reed (D-RI) in 2013. Their proposal was effectively to fine colleges with default rates above 15% and force them to pay back the government 5% of the total loan amount in default. The intent is to find a way to make schools share some of the borrowing risk with their students.

The Warren-Reed bill went nowhere, but forms of this proposal are getting a new bipartisan emphasis. It is likely to be folded into reauthorization of the Higher Education Act. The chairman of the Education Committee, Republican Senator Lamar Alexander of Tennessee, reportedly backs the concept.

As with most legislation, the real trick is how to accomplish the goal without invoking the Law of Unintended Consequences. The most likely consequence is that colleges will find subtle (and possibly overt) ways of weeding out students based on their ability to pay. It will be difficult to balance this goal without further harming diversity or creating a greater inequality gap.

Still, some effective risk-sharing effort for colleges is long overdue. When the final proposals come out, watch where the money is designated to go. Are any fines directed back toward helping students who have defaulted or are approaching default, or does the money just go back in to the general Treasury?

Unless such a fine or reimbursement scheme is tied in with a means of directly helping students, these proposals will be a step in the right direction, but will only solve one element of the problem. Let's see what evolves up on Capitol Hill.

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Victor | 08.20.15 @ 16:41
Great Article, I hope we had these when I went to college
trish | 08.20.15 @ 16:43
The rise in cost related to getting a college education has been astronomical the past few years. While I agree it is not feasible to expect a college to guarantee jobs to graduates, I don't see how most will be able to ever pay back their student loans, thus setting all graduates up for failure before they begin. We should begin with finding ways to cut costs to colleges and universities. Otherwise we will become a country with less and less college graduates, and/or more adults with debt they cannot repay.
Elaine | 08.20.15 @ 16:47
I think that they should continue work graduates on payback times. I know personally it has been a struggle and it continues to be. Luckily we have kept in contact with the Student Loan and they been understanding.
Daniel Dohlstrom | 08.20.15 @ 16:51
Education costs are growing every year, and it is not the students making them go up it is the schools So I think there should be some type of risk sharing loan fault forgiveness under specific circumstances.. hopefully something really useful develops.
Christina | 08.20.15 @ 16:59
It would be nice if more of the business would offer the training they require for the job.. Help with the cost of all that is required to work for them..
Apryl | 08.20.15 @ 17:00
I worry my husband will never see a day when he isn't paying on student loans.
Christina | 08.20.15 @ 17:09
The whole system needs to be revamped - educational costs are too high to begin with, leaving most people struggling to pay them back.
Nancy | 08.20.15 @ 17:11
There has to be a better answer than just accruing massive debt in the first place. Let's stop treating the symptom and solve the problem. We are burdening our future with unrealistic debt. Make higher education affordable for all.
Jackie | 08.20.15 @ 17:16
I don't think colleges should absorb the cost of student loan defaults. I believe students should give more thought to what they're going into before borrowing the money.
Rindy | 08.20.15 @ 17:18
Colleges do have a responsibility to look for ways to lower these costs! I find this really hard to swallow that the majority cannot get a job without a college education and then they have a hard time paying back loans for it. I am so glad things were different for me when I was growing up. Vocational school was enough then, and if colleges don't get control of this then it will have to be good enough for the next generation
Sara | 08.20.15 @ 17:19
Honestly I believe that schools should explain what student loans really mean. but not pay them fully. then again thats just my opinion
Sarah | 08.20.15 @ 17:20
The costs of going to college are just insane. All so you can go out and make money to pay for the ability to work? Yeah, that's about the size of it now if you choose college and a degree. Thankfully I went to college 100% on scholarships and grants. I would not have bothered if I had to borrow to get there.
Erin | 08.20.15 @ 17:23
How much talent is being wasted because people can't afford to go to college in the first place? How about making it affordable from the start so people won't be saddled with astronomical debt right when they're trying to establish themselves in the world:?
Kaila | 08.20.15 @ 17:26
School cost way too much money, I think more schools need to work with their students.
Zanna | 08.20.15 @ 17:29
The system definitely needs to be revamped, We need to place more emphasis on providing a solid education and less on the universities making money.
Bobbie | 08.20.15 @ 17:38
I talked to my daughter extensively about NOT going into debt or taking out loans for college. She stayed at home, went to a community college, and managed to survive just fine on all the free student aid available to her. While it turns out that at this point in her life college was not her thing (she is now in the Navy) she does not have any debt hanging over her head.
Stokes | 08.20.15 @ 17:38
I think it is time to go back to job-sponsored training. So many people graduate, realize they hate the field they've chosen (or there are no job opportunities), and go back to school. I think many students would love the opportunity to apprentice within a career before choosing a degree.
Beverly | 08.20.15 @ 17:50
The problem you have is you also have more and more people just walking away from the responsibility of paying back what they owe. There is no repercussion in place and now that the government wants to be able to wipe out student loan debt completely after 10 years(or something like that) there is even greater incentive NOT to pay it off. Personally, I think student loans are overrated and colleges are overpriced. Too many people think they have to go to big name college and I don't think that is the case at all.
Katie Greene | 08.20.15 @ 18:00
The cost of education just keeps going up. Frankly other than paying teachers a livable wage, education should be free. Go back to trade schools, learn first hand and we wouldn't have so many people working their entire lives just to pay back loans.
Britt | 08.20.15 @ 18:01
One of the negative things that comes with seeking high education is student loans and the debt that can pile up because of it. Although I am well aware of the struggles that they can cause, as I myself am a student currently - I don't think it is the job of the colleges to help or cover these debts.
Vaughn | 08.20.15 @ 18:11
The cost of college is ridiculous! It scares me what it is going to be like in another 5-10 years.
Steffanie | 08.20.15 @ 18:19
Great article and very timely for this household as we have a senior in high school looking to go into the medical field. I wish there was a way to reconstruct the system so the debt isn't so outrageous!
Heather | 08.20.15 @ 19:14
I do not think colleges should guarantee job placement after graduation. For that to happen, we need to have jobs available in every market in our country. Many things need to change in our country. First, companies need to stop moving jobs to other countries. Second, the cost of a higher education should not cost as much as it does. And third, the interest rates on student loans is crazy! Why are we giving corporations lower interest rates on loans then we are our own children? We aren't even giving them a fighting chance. The madness needs to stop!
Irene | 08.20.15 @ 19:58
I don't think you can or should make parents responsible for any loan taken out by an adult" child 18 or over. If you take out a loan you are responsible to pay it back, end of story.
Andrea | 08.20.15 @ 20:39
I do not believe colleges should have to pay on defaulted loans, But I also believe the cost of education is a joke,
Donnie | 08.20.15 @ 21:12
The students should be responsible. Even if it takes 10 yrs or more .
Chelsey | 08.20.15 @ 21:47
One of the main reasons why I have not pursued a college education is at the moment I can't really justify the cost. So many graduates are not even close to working in the field their degree is in. It's insane. The field I want to go in I don't know if a job in that field will pay for the cost of the degree needed.
Carla Truett | 08.20.15 @ 22:08
Maybe the colleges can recoup some of the cost by working better with the students to lower the payments and extend the time of the loan. Maybe put liens on income tax refunds
gracie | 08.20.15 @ 22:33
The cost of education is rising and jobs are not always easily available to find. If a decent job can't be found with the education how are students suppose to pay back the loans? It makes it a tough call for many on if they should further their education or just go with the jobs they can find without it. There need to be more reasonable payment options to help with juggling the loans.
Leah Gardner | 08.20.15 @ 22:47
I think the student should be responsible for only what it cost to go to school. Not all this interest and fees and such
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