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Another college year has begun. Another federal fiscal year is about to begin. The two are linked by the costs to the taxpayers of widespread defaults and other forms of non-payment on the over $1 trillion in federal student loans.
A fundamental flaw in the structure of this high-default government program is the role of the colleges. They are the biggest promoters, pushers, and beneficiaries of student loans. Of course the colleges are cheerleaders for a program which subsidizes them. No matter how high the default rate on these loans goes, they always represent pure cash income to the colleges. 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.
It is apparent that the incentives for colleges are misaligned. The fix is simple: colleges need some financial skin in the risky student loan game. A reasonable amount of risk sharing would be for each college to pay at least 20% of the losses which its own students impose on the government—leaving the taxpayers with no more than 80%, as opposed to the current 100%.
This sensible, fundamental reform has been proposed in the Congress, notably by Senator Lamar Alexander, Chairman of the Senate Committee on Health, Education, Labor and Pensions. It is certainly worthy of implementation before another college year goes by.
from AEI » Latest Content http://ift.tt/1JyjyP3
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