It seems like every year the student loan crisis gets worse. Currently, students are graduating with an average of $27,857 in student debt. In total, over 44 million Americans owe a record $1.3 trillion in student loans and about 4.7 million of them are currently in default on those loans.
With frightening statistics like that, it’s not surprising that politicians and pundits are trying to think of ways to fix the problem. One solution that has been bandied about is to have colleges take some responsibility when their graduates fall behind on their loans.
At first glance, it seems like it could be a good idea. The argument that proponents often make is that colleges are giving out a large number of degrees that aren’t in demand. Students are taking these programs not knowing that they are likely to struggle to find a job once they graduate.
Many of the people who advocate for colleges to take more responsibility for defaults believe that the colleges are aware of the dismal chances for employment for their graduates and yet continue to recruit, train, and graduate students into fields where there are no jobs.
They believe that by punishing colleges when students don’t do well after they graduate, those colleges will change how many degrees they give out in fields that aren’t in demand. That will thus help students by ensuring that they can only get degrees in fields where they have a higher likelihood of getting a job and it will help the government since it will mean fewer defaults. Some proponents of the plan also believe that it could encourage schools to lower tuition prices and ensure that their graduates leave school with less debt.
Seems like a good strategy, right? Well, it’s actually a terrible idea for the following reasons:
Colleges Aren’t at Fault
The plan to make colleges accountable for defaults on student loans rests on the assumption that colleges are at fault for student loan defaults. But are they?
While there is evidence showing that for-profit colleges have higher default rates - that could be because they aggressively sell students on programs that aren’t likely to lead to jobs. But that’s one small segment of the post-secondary ecosystem and to create a rule for all colleges to address the misdeeds of the few seems unfair.
There is also evidence that community colleges tend to have more students default. But community colleges have relatively low fees and those that attend have some of the smallest student loans. These high default rates could be because many community college students drop out. Community colleges also generally have more low income students and they could be more likely to end up defaulting on student loans.
But there are also other reasons why defaults might soar. The fast pace of our economy means that many students in school now will be working in jobs that currently don't exist. This rapid change means that some students might find their degrees less useful than they might have been just a few years before. This isn’t something that a college can necessarily predict.
Defaults could also be cyclical. During economic downturns, for example, default rates increase. Should colleges be required to pay for financial circumstances that are beyond their control?
It Would Hurt Students
If colleges were required to somehow pay back some of the money that their graduates defaulted on, where would that money come from? While many people like to believe that colleges are flush with cash due to large endowments and high tuition fees, that’s not true. Only a small number of schools have those legendary large endowments, and many schools are struggling to cover their current budgetary demands with tuition covered by federal dollars.
So, if colleges are forced to pay for defaults on student loans, they will have to make tough decisions. Either they redirect money from their current budget, thus reducing the quality of the education and services being offered to current students, or they raise tuition on current students to pay for the defaults of previous students.
That doesn’t seem fair, nor does it seem likely to lead to better outcomes for current students.
By holding colleges accountable for student loan defaults, colleges will be incentivized to ensure that students are able to get well-paying jobs once they graduate, but this could have unintended consequences.
For example, it could lead to a decline in Fine Arts and other degrees which aren’t traditionally associated with large income potential. While graduates from these programs are not likely to become millionaires, many artists live comfortable lives and are able to manage their student debt.
Also, if schools find that lower income students are more likely to drop out and default on their loans or graduate and default on their loans, would that make colleges less likely to admit low income students? Would it make them less likely to admit students who would need to take out significant amounts of student loans? Would they become less eligible for private lender loans?
The Bottom Line
While making colleges responsible for defaults might sound like a good idea, there are a number of good reasons why doing so would be disastrous. The student loan crisis must be addressed somehow, but making colleges pay is not an effective or equitable strategy.