How to prevent the next student loan crisis

President Biden’s expansion of student loan cancellation programs and income-based repayment plans has shattered claims that federal student loans are a financially sustainable program.the loan was already lost 1 dollar and 10 centson average, before the president’s actions $1 trillion extra at their cost.In the future, many students will repay half of what they borrowed Less than. All of this encourages schools to raise prices to capture new subsidies.

The irony of loan forgiveness is what its supporters tacitly admit about higher education. These new subsidies would not be needed if the university provided credible financial benefits. The borrower can repay the loan with interest. But the reality is that many students never graduate, and some find that their degrees are of little value in the labor market. 28% of bachelor’s degrees when considering tuition, time spent away from the workforce, and risk of non-completion not justify cost.

Congress urgently needs to amend upcoming federal loans for both students and taxpayers. Loans should only be used for programs that have a proven track record of providing students with the skills they need to graduate, get a good job, and pay off their debts.If not, in a few years we will back to where we started: More unpaid student loans and more calls for forgiveness.

Hold colleges accountable for unpaid student loans

Ann effective accountability system You will have multiple components. First, the federal government should require colleges to share the risk of nonpayment of student loans. The economic value of higher education is closely related to the rate at which students repay their loans. This is for the simple reason that student loans are easier to manage when tuition is cheaper and you earn more after graduation. Student loan risk sharing creates an incentive for schools to lower prices and increase revenues.

Specifically, if a student fails to repay the loan in full, the university must pay a penalty equal to a percentage of the outstanding loan balance. If the loan results are poor, the penalty rating should be progressively higher.

If the borrower is on track with the loan, but not enough to repay the full amount, the university will have to pay a small penalty.

But if the borrower can’t even cover the interest on the loan, the school should pay a higher penalty. That’s high enough to make college leaders question whether it’s worth staying on federal student loans. Ideally, universities will voluntarily withdraw the lowest quality programs from federal loans and shift resources to programs that provide better outcomes for students.

Require universities to guarantee risk sharing

One of the challenges in student loan risk sharing is the time lag between the government disbursing the loan and measuring the repayment results of the loan. Ideally, risk-sharing would encourage universities to work on improving outcomes before the first penalty is assessed, but a long lag weakens that incentive. Universities wishing to do so must provide financial assurance that the risk-sharing fine will actually be paid.

Schools can meet this financial guarantee in several ways. First, the Department of Education can withhold some student loan funding until results are realized. If the university owes risk-sharing fines, they arise directly from the unpaid portion of the loan. In essence, universities do not receive full payment until they produce the results taxpayers expect from their investment in higher education.

Some schools will object to requiring all student loan funds to be paid upfront in order to provide quality education. If the university is convinced that the program does not result in risk-sharing penalties, it will have to convince the third-party financial institution of this fact. Schools can receive the full amount of the loan upfront if a third party agrees to insure any risk-sharing penalties the university may incur in the future. Third-party guarantees protect taxpayer investments and provide additional market discipline to support good college outcomes.

A reward school that offers high quality at low prices

Governments should not simply punish poor results in college. We also need to reward schools that provide upward mobility for their students at affordable prices. To that end, policymakers should use funds raised through risk-sharing penalties to charge modest tuition fees and increase federal Pell Grants for students in programs that offer credible tickets to the middle class. there is.

The federal government can selectively increase Pell Grant limits for programs with high median alumni income-to-tuition ratios. This will encourage schools to enroll more students in high-value fields of study such as nursing and computer science. Additionally, phasing out additional Pell Grant funding for institutions that charge high tuition fees will discourage schools from raising prices to obtain additional aid. often happens now.

The Pell Grants program, which provides financial assistance to low- and middle-income college students, is an ideal vehicle to provide this outcome-based funding. Institutions can receive additional Pell grants only if they enroll more students who are eligible for Pell grants, i.e. low-income students.

Advancing Accountability

Congress has a chance to reform student loan programs before runaway cancellations send them off fiscal track. and use the proceeds to increase Pell grants for high-return programs. This protects students from bad outcomes and rewards universities that serve their students well. But the time is ticking. Policy makers must act quickly to stop the next student loan crisis before it hits.

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