Taking aim at mounting levels of student-loan debt, three prominent Democratic senators introduced legislation on Thursday that would penalize colleges and universities whose student-loan default rates exceeded certain thresholds.
By requiring that institutions have “skin in the game"—by assuming some of the risk of default in their students’ federal loans—the proposed legislation would create incentives for colleges to help their students find the least-expensive sources of financial aid, Sen. Jack Reed of Rhode Island said during a press call. Sen. Richard J. Durbin of Illinois and Sen. Elizabeth A. Warren of Massachusetts, who also participated in the call, co-sponsored the bill.
The proposed legislation, dubbed the Protect Student Borrowers Act of 2013, would affect only institutions that have federal student-aid enrollment rates of 25 percent or higher, and the penalties would be imposed on a sliding scale.
Colleges and universities with student-loan default rates of more than 30 percent would pay a fine to the Department of Education equal to 20 percent of the total value of loans issued to their students in default. As default rates decline, so would the proposed fines; the least-severe infraction—default rates from 15 percent to 20 percent—would require a 5-percent penalty.
According to the text of the bill, the fines would be funneled into a fund that the department would use for projects that deal with student-loan “delinquency and default prevention or rehabilitation.” Some of the revenue would also be used to “offset any future shortfalls” in funds for the federal Pell Grant. In addition, the secretary of education would have the authority to waive the penalties in certain cases.
‘Pretty Much Indifferent’
The proposed borrower-protection act is the latest in a slew of recent federal initiatives aimed at combating student-loan debt. The Education Department has long had the authority to cut off federal funds for institutions whose default rates exceed a certain threshold. The department’s controversial “gainful employment” rule, in its current proposed form, would deny funds to career-oriented programs with default rates that are too high or that fail other tests. The much-discussed college-ratings system at the center of President Obama’s higher-education plan would also probably include graduates’ debt as a metric.
Mr. Reed said the proposed bill would more effectively drive down levels of student debt, as the Education Department now punishes only “the most extravagant, outrageous schools.” He added that the prospect of penalties would get institutions “thinking seriously about their default rates and their practices and the programs they offer.”
Ms. Warren added that, currently, institutions are “pretty much indifferent” to the plight of students who are overborrowing or struggling to repay their loans. But, she said, “if a school says, ‘Wait a minute, I’ll lose money and have to rebate it back to the federal government,’ the school has a much more intense interest in making sure students have an opportunity to graduate in four years.”
The proposed legislation would hit for-profit institutions the hardest, as their graduates have the highest default rates, on average. In a statement released on Thursday, the Association of Private Sector Colleges and Universities challenged the effectiveness of the bill.
“Reauthorization of the Higher Education Act is the right way to address these issues, not a piecemeal approach to student outcomes and debt that only applies certain regulations to some institutions and, when combined, may leave low-income students on the outside looking in,” the statement said.
