There are more than a million people at least nine months behind on their student loan payments. They face the threat of the government withholding money from their paychecks, social security or tax refund. They may have a hard time getting a mortgage, buying a car or even a job. But the colleges that encouraged them to borrow rarely suffer any consequences.
That might soon change.
A coalition of liberal and conservative lawmakers is promoting a plan on Capitol Hill that would force colleges to pay up when their students default. If schools share the risk of borrowing or have some "skin in the game," policymakers figure they would work harder to keep costs down. But the approach could backfire if schools decide to weed out prospective students based on their ability to pay.
Holding colleges accountable for student loan defaults isn't a new idea. Advocacy groups, including the Institute for College Access & Success, have touted various plans for years. Senate Democrats, led by Elizabeth Warren (D-Mass.) and Jack Reed (D-R.I.), introduced legislation in 2013 requiring schools with default rates above 15 percent to reimburse the government 5 percent of the total defaulted debt. The higher the default rate, the higher the penalty.
The bill, which stalled in committee, was more punitive than the government's existing rules around defaults. A school can be kicked out of the federal loan program if for three consecutive years more than 30 percent of its students default within three years of entering repayment. Few schools hit that high threshold, and when they do the Education Department often gives them a second chance.
With student debt loads on the rise, there is growing support again for tougher default rules. Congressional Republicans are renewing the call for schools to share the risk of borrowing, as are presidential hopefuls Wisconsin Gov. Scott Walker and Ben Carson.
The policy is being considered as a part of the re-authorization of the Higher Education Act, the sweeping legislation that among other things governs federal financial aid. And with Sen. Lamar Alexander, chairman of the education committee, backing the idea, it has a good shot of advancing.
As it stands, there is little incentive for colleges to keep costs under control. As long as there is a supply of students and federal financial aid, both for-profit and nonprofit schools can charge high prices and encourage people to take out loans to cover the cost.
If schools had a financial stake in every student's ability to repay loans, they might be less inclined to saddle students with debt in the first place—or they might lower costs altogether.
Research, however, has shown that student debt amounts are not a good indicator of default. A study from the Federal Reserve Bank of New York found that the highest default rates, at nearly 34 percent, are among people who owe less than $5,000.
It would be challenging to create a risk-sharing system that benefits students without imposing undue hardship. Colleges could decide to admit fewer low-income students to keep their default numbers low.
"This federal effort could spur a wave of change that creates more inequality not less," said Sara Goldrick-Rab, a professor of educational policy studies at the University of Wisconsin at Madison. "I don't see a clear path between this action and the outcomes that are desired. And that's risky."
There are ways to prevent schools from excluding students without means, said Pauline Abernathy, vice president of TICAS. The government, she said, could reward schools with additional need-based grant aid for having low student loan defaults. The amount of additional aid would be based on the number of Pell Grant recipients at the school, which would encourage colleges to enroll low-income students.
Andrew Kelly of conservative think tank American Enterprise Institute said the government could give schools a bonus for every Pell Grant recipient they graduate to balance out the risk that some poor students will default.
"One of the strengths of risk-sharing is that the outcome measure reflects not only tuition prices but the value of the degree," he said. "If students are unable to pay back their loans, it is an indication that the student did not reap enough of a positive return on their investment to handle their obligations."
Still, tracking defaults may not be the best way to measure student outcomes. Borrowers can avoid default by deferring their payments or using forbearance, but still be struggling to make ends meet. Waiting to the worst possible outcome—default—means the government is missing other warning signs that a borrower is in trouble, for instance, if a person starts missing payments.
Getting schools to take more responsibility for student debt is an important step, but people at both ends of the political spectrum agree that driving down costs will ultimately bring down debt. The path to accomplishing that, however, is a less clear.
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