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Senators want U.S. colleges to share the risk on college loans

Published: Monday, Dec. 30 2013 4:00 a.m. MST

With college tuition climbing exponentially and student loan defaults on the rise, a group of Democratic senators is proposing a package of reforms with a plank that some conservatives have already embraced. Could bipartisan reform be on the way?

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With college tuition climbing exponentially and student loan defaults on the rise, Sens. Richard Durbin of Illinois, Jack Reed of Rhode Island and Elizabeth Warren of Massachusetts are proposing a package of reforms with a plank that some conservatives have already embraced.

Could bipartisan reform be on the way?

"One of the more controversial new proposals," Inside Higher Ed reported, "to be introduced by Reed, would require colleges with high student loan default rates to pay a penalty to the government that is proportional to the defaulted debt. Reed said the legislation is aimed at holding colleges more accountable for student loan defaults by having them share the risk of those defaults. 'They will have to have skin in the game,' Reed said. 'They will have to make financial judgments based on how well-informed and how reliable their graduates are in terms of paying back their student loans.’ ”

The loan default proposal has been gestating for some time, and much of the push has come from conservatives. In January 2012, Alex Pollock at the American Enterprise Institute argued for "skin in the game."

"Who are the most important parties to have 'skin in the game' in student loans?," he asked. "The colleges themselves, of course! They are the effective originators, the promoters, and the chief financial beneficiaries of student loans. It is their rising costs which result in ever more debt and more risk of default for student borrowers and for taxpayers."

This past summer, the Pope Center for Higher Education Policy reported on the proposal, noting that there are "strong objections to the idea of colleges sharing default risk." Economist and higher education reformer Richard Vedder told the Pope Center he expected a “firestorm” of protest from universities and lobbyists."

One major criticism is that such accountability would limit access by discouraging schools from admitting high-risk students.

"Vedder thinks that criticism is inappropriate," the Pope Center reported, because "keeping students from going to a school where they would likely default would be good for them, not bad. 'Should the taxpayer be subsidizing sending kids to go to school to make some people feel warm and fuzzy about themselves,’ Vedder asked, 'when they are in fact consigning these kids to a very, very bad future where they end up getting a job probably no better than had they not gone to college?’ ”

University of Tennessee law professor Glenn Reynolds, a libertarian, has also argued in this direction this summer, noting in the Wall Street Journal that "an extensive 2012 analysis by the Associated Press of college graduates 25 and younger, 50% are either unemployed or in jobs that don't require a college degree. Then there are the large numbers who don't graduate at all. According to the National Student Clearinghouse Research Center, more than 40% of full-time students at four-year institutions fail to graduate within six years. The National Center for Education Statistics reports that almost 75% of community-college students fail to graduate within three years. Those students don't have degrees, but they often still have debt."

"Why do students have so much debt?" Reynolds asked. "According to a recent study by Mark Perry, a professor of economics and finance at the University of Michigan at Flint, between 1978 and 2011, college tuition in the U.S. increased at an annual rate of 7.45%, vastly exceeding the rate of inflation and the almost-stagnant rate of growth in family incomes."

Email: eschulzke@desnews.com

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