Warren wants schools to have skin in the game

Michael Lux Blog, News, Student Loans 0 Comments

Senator Elizabeth Warren has been a very vocal advocate for changes to student loan policy in the United States.  Unfortunately, her proposals often fall short of her impressive rhetoric.  It is easy to appreciate her passion for helping student loan borrowers, but often her ideas are so partisan that they have little chance of getting Congressional approval.  Warren’s latest policy initiative has the potential to buck this trend.

Warren’s big idea

What she terms to be “risk sharing” would be a policy that would affect all colleges and universities.  The idea is that if students attend a school, but cannot repay their loans, the college should be on the hook financially.  This policy would reward affordable schools and it would reward schools that do a good job of finding their students jobs.  Schools with overpriced degrees and poor job placement could be in line for financial consequences.

The idea of “risk sharing” is actually something that Warren has previously proposed.  The way the original proposal works is that if more than 15% of a schools graduates default, the school must pay a portion of the defaulted debt.  As the percentage of students who default grows, the percentage that each school must pay also grows.  Risk sharing is even getting some support from conservative think tanks.

How would this legislation help students?

If you already have student loans, this policy won’t do much to help you.  However, it could make a dramatic difference in the price of higher education.

If a college is in danger of being assessed fees under this policy, it will have several options that could help students.  Colleges may choose to lower their prices so that students can afford the school without incurring unsustainable amounts of student debt.  They may also choose to spend more money in career development in order to ensure that students are finding jobs that will allow them to keep up with their loan obligations.

Better Education

One of the more frustrating aspects of dealing with student loans is how complicated the whole process is.  There are a ton of federal repayment plans out there, but getting information and getting signed up can be surprisingly difficult.  This problem is compounded by the fact that most students get very little information about these programs.  Most colleges are very helpful in getting loans for students, but helpful information about repayment is limited.  Federal student loan servicers are also notorious for having sparse information and not being helpful when it comes to getting students on the right plan.

If schools had some skin in the game, students may be much better educated about loan repayment and options.  Faced with the risk of large fines, colleges would likely go to much greater efforts to educate their students about student debt and repayment options.

Because federal loans have a variety of repayment options, with some plans allowing students to pay $0 per month if they don’t have a job, high default rates shouldn’t be so much of a problem.  If schools went to the effort of educating their students on student debt, defaults would be much lower.

Bottom Line

The idea of risk sharing has real potential.  If the school has a financial incentive to make sure you don’t default on your loans, they will go to greater lengths to prevent default.  This could include better education, lower tuition prices, or better job placement programs.  Either way, it would be a win for future students.