How to fix student loans - permanently
Presenting my plan to hold colleges accountable for student outcomes, complete with model legislation
Welcome to The Tassel, FREOPP’s newsletter on higher education policy, written by senior fellow Preston Cooper. Each month, The Tassel dives into our latest work on higher education, along with a handpicked selection of research and articles from around the web that we think are worth your time. To manage your subscription preferences, visit your Substack settings.
It’s an exciting month here in the FREOPP higher education shop. I recently published my white paper recommending a comprehensive overhaul to the way the federal government approaches accountability for colleges and universities that use federal grants and loans. The proposal, which you can read in full here, would require colleges to compensate taxpayers when former students cannot repay their loans, and reinvest the savings into extra financial aid for low-income students attending high-quality programs.
In addition, FREOPP has produced model federal legislation—the Higher Education Accountability for Loans (HEAL) Act—to put our accountability framework into law. You can access the model legislation here. If you’re interested in learning more, don’t hesitate to reach out.
Aligning higher education’s cost to its value
The federal student loan program is broken. Millions of borrowers were behind on their loans prior to the pandemic-era pause on payments, while taxpayers are expected to pick up the tab for hundreds of billions of dollars’ worth of unpaid debts. The cycle will only continue as the federal government originates nearly $1 trillion worth of new loans over the coming decade.
The root of the problem is not an insufficient subsidy. Rather, student loans go bad when the investment they financed—postsecondary education—does not pay off. Many students fail to complete their programs, leaving them with debt but not the benefits of a degree. Others enroll in programs that do not provide an adequate return in the labor market. Colleges frequently charge too much for degrees that don’t produce enough economic value to justify their cost.
While the federal government distributes over $100 billion in grant and loan aid to colleges every year, there are no effective rules in place to ensure schools provide value for money. My new white-paper proposes a three-part plan to fix this.
The core of the proposal is a requirement that colleges compensate taxpayers when their former students are unable to repay their loans. Five years after a cohort of borrowers enters repayment, the Education Department assesses whether they have made satisfactory progress. If borrowers are only slightly behind on their payments, their college must pay a small penalty. But if borrowers are severely behind, the school must pay much more—up to the full amount of the loan in extreme cases.
This “risk-sharing” proposal will create a direct financial incentive for schools to ensure that the value of their education aligns with the tuition they charge. Colleges can ensure students can afford their loans—and thereby avoid financial liabilities—by lowering prices or offering more career-relevant programs that lead to higher earnings. The worst programs, such as Columbia University’s $180,000 master’s degree in film, may find it advantageous to shut down entirely.
In addition, the proposal directs the Education Department to hold back a portion of schools’ federal loan funding until the institutions produce a financial guarantee that those compensation payments will be made. Colleges will not receive loan funding in full until they either produce this guarantee or demonstrate satisfactory loan repayment outcomes. This requirement ensures that colleges face an immediate financial incentive to make the hard decisions today that will improve their students’ economic outcomes several years from now.
Reinvesting savings in low-income students
These changes will save taxpayers around $13 billion per year, in the long run, and create incentives for schools to lower the cost and improve the quality of their education. I propose reinvesting most of these savings into extra financial aid for low- and middle-income students who pursue high-quality programs.
The plan would provide a bonus Pell Grant for students who enroll in a program where earnings after graduation exceed 300 percent of the federal poverty line ($43,740 in 2023). The plan’s formula reduces the bonus for programs that charge higher tuition, so colleges cannot simply raise prices to capture the additional aid. The bonus Pell Grant is capped at $5,000, meaning a low-income student who enrolls in a high-return program could receive a total Pell Grant of up to $12,395 (the bonus plus the 2023-24 base grant of $7,395).
That additional aid provides a powerful incentive for students to choose programs that will pay off. But it also rewards schools that offer high-quality degrees at an affordable price. The extra Pell aid will induce more students to choose those programs, boosting the revenues of schools with a high return on investment.
For too long, the federal student loan program has been a drag on the federal budget and a source of distress for many borrowers stuck with loans they can’t repay. This accountability plan will change that by ensuring that colleges hold up their end of their bargain with students and taxpayers.
You can find more details, along with responses to common objections, in the full paper on FREOPP’s website. I also encourage you to check out the model legislation.
What I’m writing
Accountability is the best way to fix the student loan program. Holding colleges accountable for their students’ outcomes is all the more urgent in light of President Biden’s plan to forgive $430 billion in student debt. Over at Newsweek, I make the case that accountability is key to preventing the next student loan crisis. While I don’t think mass cancellation is the right remedy for the student loan program’s problems, we can’t do nothing: 11 million borrowers were behind on their payments in 2019, often because their colleges charged too much and delivered too little. Many of the system’s problems could be solved if the federal government stopped making loans to educational programs without a financial return.
What I’m reading
At Reason, Ilya Somin offers the best explanation of the legal issues at the heart of the two lawsuits challenging President Biden’s loan-cancellation scheme. The program’s eventual fate may hinge on the question of whether the state of Missouri has standing to sue on behalf of the state’s loan-servicing agency, MOHELA, which will suffer financial harm from loan cancellation but is not party to the lawsuit.
In National Review, Beth Akers looks at a lawsuit challenging the ongoing student loan payment pause brought by SoFi, a company offering student loan refinancing. If the Supreme Court invalidates President Biden’s loan-cancellation plans, he may try to extend the pause once again—and SoFi’s case could be the next legal battleground over student debt.
With all the talk about student loans, it’s easy to forget that the federal government subsidizes higher education in myriad other ways. Adam Michel of the Cato Institute walks us through fourteen different tax benefits for higher education, which cost the government $322 billion per decade. Michel says there’s scope for simplification.
An excellent editorial in The Economist argues that elite universities shouldn’t stop looking at standardized test scores in the name of “equity.” Gaps in standardized test scores are a symptom of inequality in access to high-quality K-12 education. “Just as smashing thermometers does not prevent climate change, so abandoning the measurement of educational inequality will not magic it away,” the editors write.
What I’m doing
I’m writing this newsletter from the airport in Austin, Texas, awaiting my flight back to DC. I was here for SXSW EDU as well as a few other events happening concurrently. If anyone has a reason for me to go back to Austin, I’d be glad to return—I only ate my way through three of the dozen or so Tex-Mex restaurants on my list.
I also stayed a couple extra days to hike Guadalupe Peak, the highest point in Texas. Guadalupe is definitely one of my favorite highpoints so far: you can find fossils of Permian-era marine animals on the summit, and the nearby Carlsbad Caverns are simply breathtaking. (More pictures here.)
