Take a look at any college brochure and you’ll see lofty promises about top-notch educations and alumni who achieved great things. Most of us grew up hearing our parents, teachers, guidance counselors and even favorite TV shows all tell us college is the key to a successful life and a lucrative career.
Now many of us are sitting with a mountain of student debt, less-than-rosy job prospects and the sinking feeling that universities didn’t exactly make good on their promises of an education that prepared us for success.
Student loans are fast becoming the new financial crisis. Around one in three students are behind on their student loan payments. That’s almost as high as the delinquency rate on subprime mortgages during last decade’s housing meltdown!
Current Accountability Measures are Failing Students
Schools don’t face much accountability for their alumni’s failure or success. Students bear 100 percent of the risk when it comes to student loans, so there’s little financial incentive for universities to set students up for success after college—or keep tuition prices down.
Currently, the Department of Education uses the percentage of students who default on their student loans to determine whether universities should face repercussions. Schools can lose access to federal financial aid if:
· More than 30 percent of former students default for three straight years, or;
· More than 40 percent of former students default within the same year.
There are several problems with this system.
First, in order to be counted, students have to default on their loans within three years after leaving school. This gives an incomplete picture of how many former students are succeeding or failing post-college.
Second, the rules are easy to game. There are multiple ways schools can stall the Department of Education after it makes a decision, and many consulting firms help schools keep their default rates below the threshold.
As a result, few schools wind up facing the consequences for failing their students. In 2014, only one non-profit school had their federal aid threatened. In the past 15 years, only 11 schools have actually lost access to federal aid.
Skin in the Game
The current accountability system’s failure to actually do anything is why there have been growing cries from think tanks, policy organizations and even some politicians to shift accountability measures for schools to a risk-sharing model.
The new model would be simple: if former students default on their loans, the school would be responsible for a portion of the debt.
There’s already proof that a system like this would work. During the subprime mortgage crisis, lenders with risk-sharing requirements saw fewer borrowers default than those who didn’t.
Universities’ share of the repayment doesn’t even have to be big. In the subprime mortgage example, lenders on the hook for as little as three percent of the loan still performed better.
With skin in the game, universities would have an added incentive to make sure their curriculum actually prepares students for life after college. Because students who drop out are more likely to fall behind on loan payments, colleges would also have added incentive to provide students the resources they need to succeed while in school.
Let’s be clear: success or failure post-college is primarily the responsibility of the students who took out the loans in the first place.
But if schools are going to raise the price of tuition to the point where it’s nearly impossible to attend college without taking out massive loans, the least they could do is be invested in their students’ success.
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