force colleges to cosign student loans

Should we force colleges to co-sign student loans?

Michael Lux Blog, News, Student Loans 0 Comments

In a recent letter to the editor in the Wall Street Journal, the idea of forcing colleges to co-sign student loans was proposed:

“If colleges want to offer a basket-weaving major or anything else some creative professor can imagine, let them do so.  But if a student defaults, let the government “claw back” that tuition money.  Some of these vacuous courses may suddenly look less worth teaching if the school is on the hook.”

This idea seems both unique and interesting, so we thought it was worth taking a closer look at how this might work and what the consequences of the decision might be.

The Upside

As taxpayers, this seems like a compelling solution to student debt issues.  The government can provide the loans, with confidence they will get paid back in full.  Even if the student cannot repay the debt, the college almost certainly will be able to.

From a student perspective, this also sounds excellent.  Colleges will have a huge financial incentive to prepare students for the workforce and to help them find jobs.  This incentive to help in a job hunt would extend long past graduation.  As long as the school is still co-signed on a loan, they will have great reason to be willing to help their alums.

As a society we would also benefit because the institutions of higher learning will be aggressively encouraging students to study and prepare for the jobs most needed.  As demand for a certain profession decreases, the schools will have to quickly adapt and respond accordingly.  This shift could create an ever evolving workforce, equipped to handle change far better than we currently are.

The Downside

Obviously colleges wouldn’t like this proposal as it would be a huge financial risk to them.  While it is tempting to force them to just have to deal with it; problems would ensue.

The first big issue would be the price of college.  If colleges could be on the hook for every dollar not repaid, their solution would likely be raising the cost of tuition.  The math is pretty simple.  Forcing colleges to pay back loans in default means the cost to operate a school goes up.  If the cost to run a school goes up, the tuition will increase.

Another issue might be further separation between the have and the have-nots.  While college is supposed to be the great equalizer, this student loan issue could make things worse.  Colleges may create a two-tiered pricing system.  If you have to borrow money and the college is forced to co-sign your loan, the college may charge more for your tuition given the higher risk.  Wealthy families, who don’t have to borrower, could be given lower tuition because the college gets that money free and clear.

Even if the two-tiered pricing system was prohibited by the government, schools would still have a huge incentive to admit only those students who could attend school without having to borrow student loans.  This change would be devastating to middle and lower-income families.

Bottom Line

Forcing schools to co-sign on all student loans sounds like a great idea in theory.  Unfortunately, the consequences of this change have the potential to be devastating.

Forcing colleges to have some skin in the game is certainly something we should seek to attain, but co-signing student loans might be taking the idea a bit too far.