Advocates for higher education reform share a desire to improve college graduation rates and lower student loan costs, but proposals to re-align incentives could have unintended consequences.
Alex Pollock, a resident fellow at the American Enterprise Institute, wants colleges to face penalties if their students have high default rates on their loans.
“Once the colleges get their hands on the cash proceeds of student loans, the repayment performance is no concern of theirs—they merrily transfer that problem and the losses to the taxpayers,” Pollock writes.
Colleges would have stronger incentive to improve graduation rates and guide students through their college years. Accepting students who take out large amounts of loans would be less appealing. When higher education institutions have incoming students who have access to larger amounts of loans, tuition can be higher than it otherwise would be, because students can take out another loan to cover the cost.
Adrian College in southeast Michigan has launched a program to make the school more accountable for student debt, though it’s too early to declare it a success or failure. It’s a positive sign that at least one college has taken action on a growing problem.
Tennessee Senator Lamar Alexander has echoed Pollock’s concerns and proposes risk-sharing policies that punish colleges and universities who saddle students with too much debt.
Massachusetts Senator Elizabeth Warren favors penalties for colleges with high default rates as well.
Due to the diversity of higher education, however, applying such rules to all colleges and universities could be devastating for community colleges.
Community colleges are open-admission, which means that they accept any student. Punishing community colleges for high default rates, when they offer the least expensive access to higher education to anyone who enrolls, threatens the community college system.
“If your college is open-admissions, and defaulters often have fewer than fifteen credits, then how, exactly, are you supposed to control that? Selective institutions can screen out high-risk students, but community colleges can’t,” Matt Reed wrote for Inside Higher Ed.
For community colleges, default rates heavily declined with the use of income-based repayment, which structures payments based on the borrower’s income. Community college students who have smaller loads of debt, it turns out, have a higher likelihood of default.
For traditional four-year colleges and universities, penalties and risk-sharing proposals could drive costs down and improve default rates. For community colleges, income-based repayment plans and efforts to increase completion rates may be more appropriate.
When reformers advocate changes in the higher education structure, it’s crucial to keep a critical mindset if their proposals don’t account for the diverse goals, students, and institutions within American higher education.
