Sheila C. Bair, president of Washington College (Tamzin Smith/Washington College)

September will usher in the anniversary of Sheila Bair becoming president of Washington College, a liberal arts school in Chestertown, Md., with roughly 1,450 students. The former head of the Federal Deposit Insurance Corp. has a keen awareness of the financial challenges facing families in an uneven economic recovery and has responded with a series of programs to ease the burden of paying for college.

A month before graduation this year, Bair announced that all graduating seniors who took out federal student loans for the spring semester would receive a grant from the college to repay the debt. The gift was a part of Bair’s Dam the Debt program, a campaign to reduce the amount of money students borrow by offering grants. One year at Washington College costs an average $30,255 for a full-time student, after taking grants, scholarships and tax credits into account, according to the College Scorecard. Families that earn $30,000 or less can expect to pay a little more than half that amount. To lighten their load, the new president has also launched George’s Brigade, a scholarship that covers college expenses of high-performing, high-need students.

Approaching the start of her second year in office, Bair spent some time reflecting on the last year and the state of college affordability. Here’s an edited version of our conversation:

How has your perspective about the cost of higher education been informed by your first year as president?

Nationally, there has been a number of drivers. The rising levels of student debt have been a driver of tuition. It has been too easy for schools generally to raise tuition, and student can keep borrowing to pay for it. There has not been as much price discipline as you might otherwise have seen. The parallels between that and the mortgage crisis are striking in that rising mortgage levels fed a housing bubble. And we ended up making home prices more expensive, and, ultimately, we didn’t improve access. You are kind of seeing the same thing with student loans. We’re making schools generally more expensive, but the percentage of high school students going to college hasn’t really moved much. We’re up to $1.3 trillion in debt, and what are we getting for it?

You look at the increases, a lot of it has happened in the public sector. That’s because states have been cutting back, so schools have had to raise tuition, so really the cost has been shifted to students taking out loans as opposed to the state tax system having supported public education in the past. I’m assuming that’s in the background of this drive on the Democratic side to make public education free for most American families.

Related to the lack of price discipline, it’s so easy to say, “An issue arises, so let’s just hire another staff person,” instead of thinking, “Can we solve this by getting smarter, looking at efficiency?” The non-faculty hiring in particular — there are plenty of studies showing there has been a big growth in the hiring of non-faculty staff. Some of that is driven by government regulation; some of that is driven by maybe not being as thoughtful. I tell people, when somebody wants to hire a new staff person or spend more money on something, “My metric is George’s Brigade.” To maintain that program in our budget, I need to raise $20,000 a year for those students so we can cover full need. So I say, “Is it worth a George’s Brigade student?” Every $20,000 we spend, that is either a George’s Brigade student that I can’t fund, or I have to go out and raise the additional money.

What kind of response have you received when you frame the issue like that?

Well, it stops them. Washington College is better than most. People have been very receptive to the issue of affordability, very receptive to trying to find cost efficiencies. I give that example because hopefully other schools do think of it in those terms. If you are heavily reliant on tuition, every additional dollar that you spend, you grow your budget; a good chunk of that will be coming out of the student’s pocketbook, whether income, borrowing or whatever.

You need to be thoughtful about spending money. That said, it is expensive, especially for a small liberal arts school where we keep our student-faculty ratio at 12 to 1; we keep our average class size at 12. That means we bring in an additional 12 students, we hire another faculty member. Also, because you want to have small class sizes, the more you grow your student population the more facilities you need, dinning halls, etc. It’s inexpensive to put a young person in a lecture hall with 300 other students and have a teaching assistant teach them, but what kind of quality of experience are we giving our young people?

We offer regular faculty; you’re going to interact directly with them and your fellow classmates in small settings that are conducive to robust discussion. You’re going to get out of the classroom; you’re going to be doing experiential learning. You’re going to be doing collaborative research in the summer or during the school year with faculty. Those are the things that a small school can give that are very enriching for students but not inexpensive. We want to hold the line on costs, but this is a very special way of providing education. But it’s not an inexpensive way of providing education.

How do you preserve that kind of high-touch education in the face of affordability concerns, expenses and a shrinking high school population?

About 10 percent of our students are international now, so there is growth in that age group. This intimate, high-quality, high-touch educational experience is one that a lot of non-U.S. students find very enriching and attractive. We also recruit on the West Coast and the Southeast because the demographics are better than the Mid-Atlantic region where we’re located. Forty percent of our students do come from Maryland, and we’re proud of the service we’ve provided Maryland youth over the years. I think you just need to get smarter about how you spend your money. You need to direct as much philanthropy as possible to scholarships. These schools with these multibillion dollar endowments, and they’re still charging full tuition to students, I just don’t get it. What better use of your endowment then covering the lion’s share of your students’ education?

We need to think about what happens to these kids once they graduate. For liberal arts schools in particular, the challenge of overcoming the skepticism that somehow we’re not preparing them for the job market, which is not true. Forty-five percent of our graduates last year were STEM (science, technology, engineering or math), economics or business. But we have a lot of English and history majors, too, and guess what, they got great jobs. We are teaching communication and critical thinking skills that will allow them to adapt in an economy that’s constantly changing. Getting that message out and really redoubling efforts to make sure kids have good job placements, good graduate school placements when they graduate is really key. Those kind of results that we can demonstrate to policymakers is important.

I worry that we are getting politically isolated. The Democrats are all in on public education, and people on the right think liberal arts is irrelevant. I don’t get that. Math is liberal arts. I would hope the Republicans wouldn’t take the route of trying to dictate to kids what their majors should be, withholding federal aid if they want to major in history. That’s a really bad idea.

You have taken issue with the way federal loans work, so how would you redesign the program?

I would have one loan, get rid of PLUS, get rid of all these different loans. I’d have some overarching cap. Jeb Bush proposed $50,000, and that sounds about right. I think the average debt for an undergraduate degree is about $29,000, so give some cushion for people going to graduate school. But a $50,000 cap would prevent kids from getting way in over their head. And then, I’d have income share as a repayment plan. It gives you some downside protection. With income share, the kids that become the hedge fund managers that make a lot of money, on a net present-value basis, they are going to be paying back a lot more than the young person who goes to work for a nonprofit or teaches math in an inner-city high school.

And then, I’d have risk retention for the schools. If they have high default rates, they need to take some of the loses. For the schools that really are underperforming, it would help align economic interests to make sure they’re thoughtful about when their students are borrowing, that it makes sense and that students are going to be able to service the debt once they graduate. That’s an indirect way of imposing the same type of discipline on making sure the education is relevant and one that prepares the child once they graduate.

That would be a simple, elegant program that would align economic incentives, make it much more student friendly. Keep Pell and those kind of programs for the very lowest-income kids. Debt is not the right model for them. But for most of the population, it makes sense to borrow. Borrowing is a good investment up to a reasonable limit. And it makes sense for our taxpayers to invest in students so they can get a college education to fulfill the needs of our labor market.

Would you be willing to experiment with income-share agreements at Washington College?

Yes, we’re looking at what Purdue University is doing now, and we are thinking about it. It’s really new, and we would need to fund it through philanthropy because the federal government obviously doesn’t do it now. But I would like to see if we could launch something like that. I really like the downside protection feature of it. Federally subsidized loans are still going to be the lowest-cost options, so that should always be where the student goes first. But if they are into private loans and PLUS loans, this is probably going to be a much better option. I would love to get some funding to launch a pilot of our own. I really respect what Purdue’s doing.

Talk to me about the higher-education policy proposals that have emerged in the presidential campaign. What do you think about the Democrats’ ideas for expanding or re-imagining higher education?

A lot of it just strikes me as doubling down on what’s been broken already. If you want to make [college] free, I don’t think we can afford that. I think we’re loading up kids later on with a lot of debt, and we should be going the other direction. But do it through some kind of grant or voucher to let the child pick the school they want to go to, instead of saying we’re going to subsidize public [higher education] and make that free for 80 percent of the population, everybody else fend for themselves.

What you end up getting is that schools like mine just become a lot more elite. The overwhelming choice is going to go to public schools, so the people who are wealthier are going to go to private schools. That’s unfortunate for students and the schools themselves. A lot of private schools probably won’t survive; the weaker ones probably won’t because they won’t be able to compete with free. The value of our higher-education system is we have choice. We have private; we have public; we have vocational; we have for-profit and nonprofit schools. Preserving that choice is important. Also I worry that with all of this new government funding is going to come a lot more regulation to counter the lack of discipline. And that doesn’t work very well. Having risk retention is a much more elegant solution, but that doesn’t work if it’s free because there’s no risk. The taxpayers have the risk.

College affordability seems to be a focal point of yours, with the Dam the Debt campaign and other initiatives. What reaction are you getting from alumni and donors when you say you’re going to make an effort to serve a population that needs the most financial help?

I think they like the fact that they know exactly where their money is going. The money pays down graduating seniors’ debt. I think they like the fact we’re doing something about this, banks in particular. There have been a number of banks, like BB&T, that have donated. They understand that this debt overhang when students graduate delays other types of financial transactions they may undertake later on. I know people dispute this, but studies I’ve seen are pretty convincing that it does delay starting a business, buying a car, buying a house. There are a lot of other things going on with home ownership, but student debt is a part of it.

We’ve made a concerted effort to raise our alumni awareness of the importance of giving. The dollar amounts are nice, but the fact that they participate is important because that’s something donors and foundations look at. We’re raising awareness, and we’ve moved our alumni participation rate up by 4 percentage points. We raised $23 million, so it was a record year for Washington College.

You mentioned that you’ve gotten a lot of banks on board, so is this a part of you being able to leverage your prior experience?

Certainly, I know people, and with fundraising it’s always better when they know you as opposed to calling cold. These banks have worked with me in the past. They knew what I did at the FDIC. They trust me and know I’ll do exactly what I say I will do, and that’s an important thing for donors to have confidence that they know how their money is going to be used, and it makes a difference. And Dam the Debt makes a huge difference.

What programs do you have in the works for the coming year?

I’d like to start a scholarship program for our international students because they can’t qualify for federal financial aid. They’re full pay, and because they’re full pay it’s only the very richest kids who can come. I would like to expand our demographic.

I also want to look at income-share agreements and see if that’s a possibility for us. And then, we will keep building on Dam the Debt and George’s Brigade.

We’re also looking at another incentive program. I’m a savings person, and I like to encourage savings, so for families who have saved for college through 529 plans or ESA plans to give them some scholarship credit. We’re trying to calibrate the mechanics of that, but I think rewarding savings, especially because families get dinged on the federal programs, is a statement that we value families who try to plan for their kids’ education. It would be for family members and parents.