One of the biggest problems with the student loan scam is colleges have no skin in the game—the schools can suck the student in, drain all the student loan money, and spit the student out with no penalty to themselves. That’s pretty much the business plan of half or more of colleges in our country today, and it’s often suggested that we should penalize the schools who engage in this exploitative business practice.
For the most part, I think risk-sharing between the college and student is a good idea, but a recent article argues against it:
Strangely enough the author isn’t a college administrator (i.e., of the caste who’ve profited mightily from the student loan scam), but a professor, in philosophy, no less. Philosophers don’t merely question the nature of reality, sometimes they handle more prosaic issues:
Risk-sharing has the potential to improve the outcomes of students from schools, typically for-profit institutions, that fail to help students graduate and find viable careers. However, as a researcher who studies the ethics of debt, I also see significant limitations.
Absolutely, there are moral concerns with debt, but our current situation where fifty million people have student debt, and many millions of those have utterly no hope of paying it off (and most have little hope), I sure hope her concerns about possible risk-sharing are weighed against the problem we definitely have right now.
There are a few ways to handle risk-sharing. Let’s start with the first:
In the simplest versions, all colleges and universities would be required to pay a penalty when former students default in order to help offset the cost of that default to the government.
This is utterly stupid. We already have a similar penalty with the Pell Grant scam—if the school admits too many fake students, it has to pay a penalty. The problem is, this fraud is most heavily practiced at state community colleges. So, here’s the basic structure:
1. Admin admits a huge number of fake students.
2. Admin gets massive pay raises and bonuses for “growing the school,” while punishing any faculty who try to stop the fraud.
3. The school gets caught, and pays a fine. This fine comes from tax dollars; the admin walk away free—their salary won’t even be reduced, though it was raised via fraud.
4. Faculty are denied pay raises…no money, you see, because the tax dollars were spent to pay the fines.
Now the more expensive schools don’t really use the Pell Grant scam, but they’ll do something similar. At best, they’ll just raise tuition to cover the “penalty” if the student can’t pay it back.
More complex versions would require that such penalties only be paid after a college’s graduation rate falls below a certain level, or if the student loan repayment rate among former students falls below a certain threshold. There could be a sliding scale, so that lower graduation and repayment rates trigger higher penalties. Some versions would even give bonuses to schools for enrolling needy students and improving completion rates.
I’m not a big fan of adding complexity but I concede that schools aren’t always 100% responsible for a student being unable to pay back the loan, so allowing some small percentage of students to default without penalty to the school is fine. And, sure, if the school serves the needy, that percentage could be raised although…why not just give the needy scholarships and eliminate the complexity?
“Improving completion rates” is irrelevant, what matters is paying back the loan money. Any school can just print degrees, after all, it’s part of what got us into this problem in the first place.
If implemented well, risk-sharing could…
Yes, under the assumption it’s implemented well, it could work well. That’s…a bit circular, eh? So what’s the problem, exactly?
While risk-sharing would shift some of the costs of providing student loans from the government onto colleges and universities, it’s not known whether and how much risk-sharing would lower overall debt levels – or individual debts of borrowers who default – and ultimately lessen the negative impacts of that debt upon borrowers and the economy.
Yes, we don’t know how much this will lower debt levels, because it hasn’t been tried on anything resembling a large scale. We have a huge problem right now, and risk-sharing or otherwise holding schools responsible for burdening students with unpayable debt has a decent chance of reducing that problem. “We don’t know the full effects…” isn’t a counter-argument, the author needs to indicate why risk-sharing would make the problem worse.
Some economists have suggested that the revenue from risk-sharing be used to give bonuses to institutions that do a good job of serving low-income students. On the other hand, a student advocacy group has recommended that a portion of the revenue be used to provide “much needed and justified borrower relief.
Wow they’re already looking to spend the “revenue” that hasn’t even arrived from the risk-sharing programs which haven’t even started yet! It’s this kind of thinking which got us so deep into debt in the first place. Economists clearly aren’t educators, so of course they’d want that money to go to “the institutions” (more accurately, the administrators); an educator will immediately tell you this money should go to debt relief. Period.
I’m still waiting to hear what the problem is with risk-sharing…
Seventy-four percent of millennials with student loans experience elevated anxiety, depression, sleeplessness and other symptoms linked to the persistent stress of carrying high levels of student debt specifically. And the weight of student debt is preventing more young adults from taking risks and pursuing dreams, for example by starting new businesses. Student debt even contributes to the problem of rural “brain drain,” because many recent graduates find that they must move far away from their preferred communities in order to find jobs that pay enough to enable them to pay off the debt.
The above are certainly all problems with the current system. Only in the very last paragraph of this essay is “the problem” finally addressed:
These harms, to individual borrowers and ultimately the economy, are not addressed by risk-sharing proposals.
Um, what? If we stop slamming every deadhead into college debt—the primary benefit of risk-sharing–we’ll have far fewer of the problems addressed above, because we’ll have far fewer kids with student debt. I’m scratching my head at why this isn’t obvious here, though I concede philosophy isn’t my best subject (though I have covered a few courses when the professor had a heart attack).