“Risk sharing” — the idea that colleges should bear some of the cost when their students default on federal loans — is catching on in Congress.
Last week, senators in both parties came together on an amendment to the Senate’s spending blueprint for the 2016 fiscal year that expressed support for the idea. The amendment, which would create a “reserve fund” to reform student lending, passed easily.
That rare show of budgetary bipartisanship came just four days after Senate Republicans issued a paper exploring ways to give colleges more “skin in the game” when it comes to student lending. Senate Democrats, meanwhile, said they would soon reintroduce a bill that would fine colleges with high default rates.
The goal, supporters say, is to give colleges a stronger stake in whether their students graduate and whether they can repay their loan debt. Proponents argue that existing accountability measures do little to encourage colleges to rein in tuition, reduce students’ debt burdens, or help students complete their degrees.
“Current federal incentives reward colleges for volume (number of students enrolled and associated loan and grant monies),” the Republican paper on risk sharing reads. “Yet federal policy has few, if any, consequences for institutions that leave students with mountains of student debt and defaulted loans.”
Policy groups across the political spectrum, including the right-of-center American Enterprise Institute and the left-leaning Institute for Higher Education Policy, have endorsed that concept. But risk sharing is not without its critics.
Among the most vociferous ones: community colleges. Their advocates say it would be unfair for the federal government to bill the colleges for loan defaults when the colleges have little control over who borrows, how much they borrow, or who collects on their loans. Community-college groups warn that risk sharing would compel colleges to tighten their enrollment standards or leave the federal lending programs altogether.
“It could well serve to limit access for students,” said David S. Baime, senior vice president for government relations and research at the American Association of Community Colleges.
Justin Draeger, president of the National Association of Student Financial Aid Administrators, said risk sharing could also dampen innovation, making colleges reluctant to invest in unproven programs. He bristles at the notion that colleges have no “skin in the game” now. After all, colleges lose money when students drop out, and they can lose access to federal student aid if their default rates rise too high. “It’s not as if a school has nothing to lose,” he said.
Tackling Overborrowing
Underlying the fight are two key questions: Is the government lending too much money to risky borrowers? And who should be held accountable when those borrowers default?
Right now, the government provides billions of dollars to students each year, with few eligibility hurdles: Anyone with a Social Security number, citizenship, and a high-school diploma or the equivalent can qualify. Colleges can counsel students to limit their debt, but they generally can’t prevent students from borrowing the maximum amount they qualify for.
That easy access to financing has helped democratize higher education, making college accessible to borrowers with little or no credit history. But it has also contributed to ballooning debt burdens and rising default rates. The Obama administration estimates that nearly a quarter of Stafford Loans issued to undergraduates this year will wind up in default.
Hardly anyone favors tightening underwriting standards on federal student loans. But community colleges and others have argued for more limits on how much students can borrow.
Those groups want Congress to set lower loan limits for part-time students, and reduce aggregate borrowing limits for borrowers attending two-year colleges.
Support for lower limits is growing among lawmakers, though the idea remains a tough sell. The Republican paper on risk sharing mentions loan limits only obliquely, in a section on “other principles and questions to consider.”
“Colleges and universities lack the authority and tools to manage student debt levels,” the paper says.
Meanwhile, both parties seem inclined to exempt some institutions that have relatively few borrowers from penalties under the plan. That approach would spare many community colleges, which tend to have low borrowing rates and account for just 10 percent of Stafford Loan borrowers.
That would give community colleges a competitive advantage over for-profit institutions, where borrowing rates are typically higher. Noah Black, a spokesman for the Association of Private Sector Colleges and Universities, said his group was still reviewing the concept and wasn’t prepared to comment on it.
Shared Risk
Student-aid reformers have been kicking around the risk-sharing concept for several years. It first made its way into legislation two years ago, when Senate Democrats, led by Jack Reed of Rhode Island, offered a plan to require colleges with default rates exceeding 15 percent to pay penalties to the government, on a sliding scale.
The Republican paper released last week doesn’t endorse a particular approach, but it floats the possibilities of requiring colleges to remit a portion of defaulted dollars to the federal government or cutting off their access to some federal funds.
Pauline Abernathy, vice president of the Institute for College Access and Success, which has called for risk sharing in student lending, said she found the bipartisan interest in the idea encouraging.
“There is clearly not enough accountability for schools right now,” she said.
Under current law, colleges whose default rates exceed 30 percent over three years or 40 percent in one year can become ineligible to award federal student aid. But default rates are easily manipulated, and few colleges fail the test. Since 1999, only 11 colleges have been kicked out of the federal student-aid programs as a result of high default rates, according to the Congressional Research Service.
At the same time, that “binary” approach to accountability has given colleges little incentive to take steps to bring their default rates under 29.9 percent. As long as they remain just below the cutoff, they are in the programs.
Under most risk-sharing models, the penalty paid by colleges would increase as their default rates rose. Ms. Abernathy described that as “a rejection of the all-or-nothing approach to accountability.”
“There’s a consensus forming that we need something more incremental,” she said.
But Mr. Draeger said there’s an easier way to shift more of the risk of student lending onto colleges: extend and expand the Perkins Loan program.
The program, which is set to expire this fall, operates as a revolving fund, with colleges committing 33 cents of their own money for every dollar provided by Washington. When borrowers default on their debt, colleges lose some of their investment and have less money to lend in the future.
“Why would you eliminate a program that already has shared risk,” he asked, “and then create this whole new concept of shared risk?”
Kelly Field is a senior reporter covering federal higher-education policy. Contact her at kelly.field@chronicle.com. Or follow her on Twitter @kfieldCHE.
