Problem
Many students struggle with the cost of higher education, experience poor labor market outcomes, and consequently have difficulty repaying their loans. The misalignment of schools’ incentives with those of students and taxpayers is a major reason for the growth in unmanageable student loan debt. Moreover, the move towards more flexible repayment terms for students has rendered the existing accountability system less effective.
Proposal
The authors propose an institutional accountability system to align the incentives of institutions with their student loan borrowers and taxpayers. Under the risk-sharing proposal, institutions with poor loan performance reimburse the federal loan program for a fraction of unrepaid loan dollars. Specifically, the proposal uses a loan repayment rate—the amount each institution’s students have repaid after five years—to set minimum thresholds below which institutions would have to make risk-sharing payments. Recovered funds would be used to provide support to institutions that serve low-income students well.
Abstract
Many borrowers have difficulty repaying their federal student loans, particularly at certain institutions. This paper proposes an institutional accountability system that is intended to help align incentives of institutions with their student loan borrowers and taxpayers. Under the risk-sharing proposal, institutions with poor loan performance reimburse the federal loan program for a fraction of unrepaid loan dollars. In particular, the proposal uses a robust and hard-to-manipulate repayment rate—the amount each institution’s students have repaid after five years—to set minimum thresholds below which institutions would have to contribute. Recovered funds could be used to provide support to institutions that serve low-income students well.
