With student loan debt approaching the $2 trillion level and default rates rising, Republicans in Congress have advanced legislation that would require colleges to repay a portion of its students’ unpaid loans.
The idea of risk-sharing is not new. In the pre-Covid era, the suggestion that colleges should have some skin in the game by helping students pay down their debt, cosign student loans or retrain them at no expense, if their graduates can’t get a well-paying job in their field, was in open discussion. The current proposed legislation indicates that high student debt will remain a significant issue in post-Covid America no matter who controls the White House or Congress.
In fact, the experience of the last few years provides a spectacular example of why colleges, in either a pre- or post-pandemic environment, have little if any responsibility for helping pay down student debt if the outcome of a college education is perceived as success in the labor market.
My argument for limited liability rests on three positions. First, success in the labor market is not the only goal of a college education. Second, even if we look at just labor market outcomes, those with the fewest resources, such as the community colleges, predictably, have the poorest outcomes. Penalizing them for the consequences of underfunding is a double hit on the colleges and students who attend them, which has profound equity implications.
Finally, finding a good job is influenced heavily by the business cycle, over which colleges have no control. My arguments in support of these three positions, and more workable solutions to the student debt problem, are an extension of what is already known about what works in the higher education industry.
Value of college
It is widely accepted that higher education generates public, as well as private, benefits. Advocates of greater funding for public colleges, for instance, emphasize public benefits such as civic participation, reduced crime rates, increased tax revenues and greater productivity as benefits that spill over to the larger community.
These public benefits are harder to measure than the private ones, such as higher incomes and lower unemployment. Those who suggest that colleges share the cost of repaying student debt often overestimate the private benefits that college generates and underestimate the less measurable public ones.
Absent from the private/public benefits discussion is the transformative role of colleges, especially for younger students. As Andrew Delbanco, writer and professor of American studies at Columbia University, has said, “It is often students of lesser means for whom college means the most — not just in the measurable sense of improving their economic competitiveness, but in the intellectual and imaginative enlargement it makes possible.”
One might think that this is a romantic notion that does not apply to the great bulk of students entering less selective four- and two-year colleges. But I, for one, am not willing to give up on this group.
After an extensive group of interviews with lower income students enrolled in California community colleges, the late research professor Mike Rose (UCLA) concluded that — sure, people go to college for economic reasons, but “people also go to college to feel their minds working and learn new things, to help their kids, to feel competent, to remedy a poor education, to redefine who they are, to start over.”
Community colleges need to be increasingly aware of the transformative role that they are capable of playing. The opportunity for a residential and broad-based educational experience should be available to as many students as possible. Public policies that shift young students away from this environment must be undertaken with caution.
However, in a vast number of cases such an experience will not be possible even if income inequality is reduced. In this case, the designers of the curriculum at both two- and four-year colleges must realize that not every course in a student’s program must pass the workplace utility test.
College resources and outcomes
The lowest-resourced colleges enroll the students who need the most help. Over 70% of students attend public sector colleges and 40% of undergraduates are enrolled at the community college. No matter what year we look at, we find that, within the public sector, the research universities have about three times as much revenue to spend on each student as do community colleges and twice as much as regional colleges.
Money matters and poorly resourced colleges produce poor outcomes. They have lower graduation rates, lower lifetime incomes, on average, and higher debt default rates. Some of the fault for poor outcomes lies with weak preparation for college from underfunded elementary and secondary schools, a family structure that can’t help students navigate the complex admissions and financial aid games, past and present discrimination and large income and wealth gaps. But, some of the fault also lies with the poorly resourced colleges these students attend.
Given all these obstacles, how do we know that spending money on these low-income students is not a lost cause? Well, it turns out that several experiments with rather large increases of funding and spending on these students have shown rather dramatic results.
The City University of New York’s Accelerated Study in Associate Programs (ASAP), for instance, increased the graduation rate of students who needed remedial work to 40% for students in the program as opposed to 22% for students in the control group. This was accomplished by providing enough funding to require full-time study and wraparound counseling and financial support of non-tuition costs, such as transportation to school.
The ASAP program was so successful and well-publicized that other states tried modified versions of it that fit their locals. Similar positive results were found in experiments in Ohio, California and upstate New York. All showed that with adequate investment, low-income students need not be denied the opportunity for achieving upward mobility.
Until we get serious about reducing income inequality and providing greater opportunities for low-income families and students, colleges cannot be held liable for missing the outcome goals that society expects of them.
Business cycles and outcomes
An increasing number of states are linking public college funding with performance metrics. There is a particular emphasis on labor market outcomes, although this presents significant challenges because these outcomes fluctuate with the business cycle.
Research supports the observation that recessions not only reduce job placement rates and wages of college graduates but also lifetime incomes and loan default rates. Graduating during an economic downturn can negatively impact job prospects and students’ ability to repay college loans, irrespective of colleges’ efforts to promote student success.
While the connection between the business cycle, incomes and default rates affects all colleges, it is especially evident at the community college level. If colleges are required to repay a portion of students’ loans, will these payments be continuously adjusted for the health of the local labor market or the changing mix of students who enter as the business cycle moves? It is unlikely that any legislation would provide such a level of flexibility and sophistication.
Indeed, this form of risk-sharing would act as a tax on colleges. Just as a tariff acts as a tax on consumers, this college tax will disproportionately affect students and colleges that can least afford it, worsening outcomes and exacerbating income inequality.
Colleges will pass this tax, or a portion of it, onto students through increases in tuition and fees. This adjustment is easier for more selective colleges but more challenging for less selective institutions, such as community colleges, many of whom will face bankruptcy.
Community colleges that survive are likely to follow patterns observed when public funding diminishes, such as increasing the number of adjunct faculty, reducing student services and implementing other cost-cutting measures, which lower quality. Consequently, the burden of the tax, whether through higher fees or reduced quality, will fall on students who can least afford it.
What to do about student debt?
Scrap the idea of requiring colleges to pay a portion of student debt for the reasons explained in this essay. The debt problem is really a repayment problem, so how do we make that easier without forgiving all the debt? These suggestions rely on what research already tells us works.
Student loans are important if low-income students are to have access to higher education where they can explore their interests and find their niche. A single federal loan program should be established. It should be income-based with payments tied automatically to changes in income, as some other countries do.
Right now, students face a confusing array of repayment plans and must fill out complex paperwork each time their income changes. Likewise, there would be no need to go through the current cumbersome process of public service loan forgiveness, as long as any loans remaining after 20 to 25 years are forgiven.
It is OK for states to rely on a high-tuition/high-aid policy for partial funding of their higher education sector, as long as federal and state grants such as Pell are increased along with the cost of living and support services, such as TRIO, are maintained. The current effort to weaken the social safety net will reduce access and make it more likely that students will be forced to take out loans.
Healthy labor markets make it easier to repay student debt, but colleges cannot guarantee the job openings necessary to employ its graduates. Colleges cannot promote social mobility by themselves, but they can help if the proper monetary and fiscal policies are used to promote full employment.
Improve graduation rates by better funding of the lowest-resourced colleges, in particular community colleges. We know that money matters, and what experiments with ASAP-like programs show is that increased funding can dramatically increase graduation rates. This not only reduces default rates but has positive spillover effects on other family members and society.
Put pressure on colleges to be upfront about labor market outcomes and loan default rates. This information already exists in federal data sets. This information should be required for all public, private and for-profit colleges, to warn students which programs are high risk and not in demand. A uniform method of presenting these outcomes should be established and colleges should be required to put them on the college website next to each program. Accrediting agencies should be required to consider compliance with this recommendation as part of their accreditation process.
If colleges have programs where graduates earn less than the average high school graduate after 10 years of graduating, policies should be in place to force the colleges to repay at least half of the students’ remaining loans. In this case, whatever public benefits that might accrue to the students and society are overshadowed by the very poor private benefits to the students. Something along these lines should help to weed out the worst of the bad actors who prey on students.
Harder than it sounds
It is clear from the arguments above that no college can be held responsible for guaranteeing a good job and timely repayment of student loans for all who enroll. Too many things can happen even after graduation to derail the best-laid plans. Besides, calculating the share that colleges would need to pay would be complicated. Even a simplified version of a risk-sharing plan is likely to bankrupt open-access colleges that are already taking a risk by admitting all students who apply.
