No: Holding colleges responsible won’t reduce loan defaults

For many years, education policy experts whom I respect have argued in favor of making colleges have some “skin in the game” with regard to student loans. That is, they should have to bear at least some of the loss if a student they accepted later defaults on his federal loan.

That would be a step in the right direction, but it doesn’t solve the problem.

Sound finance is based on the principle that the party extending credit should be the party who suffers the loss if the loan goes sour. That keeps lenders alert to the borrower’s circumstances.

If the risk seems too great, the lender will just say, “We don’t want to make this loan.”

That’s not how it works in higher education, because colleges typically are not the lenders.

If colleges did lend to their students (and there is no reason why they can’t, but it is unusual), then they

should and would bear the risk of defaults. But the “skin in the game” policy is rooted in the assumption that the federal government will continue lending to students, and then the colleges that accept these students — and government’s money — would have to pay back some percentage of the loss if the student can’t or won’t repay.

That probably would make colleges more careful about which students they accept and also cause them to rethink their curriculum and standards.

This would improve the incentives somewhat, but some (probably most) of the losses would still fall on taxpayers, so college officials will continue accepting academically marginal students in hopes that they’ll pay back their loans.

For a fair number of colleges, turning away any students is unthinkable due to their precarious financial position.

We need to get at the root of the problem, which is that readily available federal grants and loans lure many people into college who are not prepared for or interested in higher education.

National Review writer Kevin Williamson nailed the truth in his recent article, “An Idea for Student Loans: Get Rid of Them,” saying that the current system is just “a conveyor belt for carrying government money into the universities.” It has enabled colleges to spend far more than in the past, while actually educating far less. The only way to stop the waste, of which student loan default is only the most visible evidence, is to close down what he calls the Bank of Uncle Stupid.

Federal college subsidies through loans and grants was one of the many bad ideas of President Lyndon Johnson’s Great Society. In fact, there is no provision in the Constitution that authorizes the federal government to loan or give money to college students; but back in the 1960s, no legal challenge to any expansion of government was taken seriously.

Once the faucet of federal money was opened, politicians just kept opening it more.

The massive amount of student debt and increasing default rates has people thinking about the issue, but the ideas being floated either would make only a slight improvement (like “skin in the game") or would make it much worse (like the proposals to make college “free” and forgive the debt of many students).

Our higher education system was far more sensible and efficient before the federal government began subsidizing it. We need to undo that mistake. But that won’t happen until America realizes that the flow of federal money into higher education has transformed it for the worse. Turn off the faucet.