Washington, D.C. — With concerns about student debt struggles on the rise, the federal government, taxpayers, and students need a new system that better holds institutions of higher learning accountable for loan failures while also rewarding those institutions that succeed with vulnerable borrowers, says a new report from the Center for American Progress. The report, “Sharing the Risk,” lays out a new vision of risk payments that institutions would make when student loans default or are not repaid, as well as rewards for schools when institutions have more students repaying than expected. CAP’s report is one of eight papers released today on the topic of risk sharing in higher education. These other papers were commissioned by CAP to reflect a diverse range of approaches to risk sharing and do not reflect CAP’s views or opinions.
“Of the three main participants in the federal student loan system—the federal government, students, and institutions of higher education—only schools currently bear none of the risk when a debt goes bad,” said Ben Miller, the Senior Director for Postescondary Education and a co-author of the report. “That’s not fair. Institutions need to share more in the responsibility and the risk of student loans, but any payment system must also come with rewards for schools who succeed with vulnerable students. Risk sharing payments must be balanced with bonuses or the entire system will fail.”
CAP’s proposal calls for institutions to pay back a portion of students’ loan balances when one of two negative financial outcomes have occurred within five years of entering repayment: default or failure to repay on a reasonable schedule. In each case, the share of affected balances that a school would be required to pay back would be equal to the rate at which students defaulted or did not repay. In other words, if 20 percent of students default, then the school would have to pay back 20 percent of the balance of loans in default. Risk sharing payments would also be calculated separately based upon whether a borrower completed or dropped out as a way of drawing greater attention to the connection between finishing college and loan repayment success.
While a risk sharing system could create powerful incentives for institutions to improve their results with student loans, it also contains substantial risks of unintended consequences. To guard against this concern, CAP also calls for the availability of bonuses that would be awarded to institutions where more students repay their loans than expected. Bonus amounts would be given for each student repaying beyond the number anticipated, with maximum amounts of $5,000 for each student and $10,000 for each Pell Grant borrower.
Click here to read CAP’s report “Sharing the Risk: A Plan for Colleges to Participate in the Costs of Student Loan Failure” by Ben Miller and CJ Libassi, as well as short summaries and links to the other risk sharing reports released today.
Below are the other authors in the risk sharing series with links to their papers:
For more information or to speak with an expert, contact Allison Preiss at [email protected] or 202.478.6331.