How to fix student loan system

In addition to wiping out a lot of existing student debt, President Joe Biden has changed how loans will (or won’t) be paid back going forward. Unfortunately, his changes don’t address the underlying cause of big, unlikely-to-ever-getrepaid student debt balances: the high cost of college, particularly at scammy schools.

In fact, absent some additional safeguards, these changes might encourage more borrowing and higher tuition.

My inbox has been flooded with emails from furious people with enormous debt burdens they fear they’ll never escape. Most argue that, if anything, Biden’s plan was too modest and should have wiped out much more debt. Most of these correspondents attended lowquality for-profit schools.

These are institutions with abysmal completion rates and programs that often don’t pay off even when completed. Those carrying huge debts linked to such programs have been, broadly speaking, ripped off. Many will never be able to pay off their debts. They deserve help from the government, in the form of more-generous loan forgiveness.

But the schools these people attended or are still attending will continue being able to rip off students, on the government’s dime, and to persuade yet more students to rack up yet more debt for all-but-worthless programs. Uncle Sam will again be left holding the bag when these future classes can’t pay.

Everyone likes to point out how expensive top-tier universities are, but they’re not the problem. However expensive their prices look upfront, they usually do pay off. That is: Their students graduate and earn a decent return on their investment through higher lifetime wages.

The more problematic schools are the ones where few students complete what’s supposed to be a four-year degree within six years and whose students have high loan default rates and disappointing job outcomes. Not all for-profit institutions are bad, but they are overrepresented in those ranks: Forprofit schools enroll only about a tenth of all students yet account for half of all studentloan defaults.

Students at for-profits also end up borrowing far more than demographically similar students at public schools, partly because two-year forprofits charge, on average, more than $10,000 more in tuition than community colleges do.

Even with poor track records, schools can receive more than 90% of their revenue from the federal government through student-linked grants, loans and other payments. Worse, they can get sued repeatedly for defrauding students and continue receiving public funds. Some of the institutions named in a recent court settlement regarding misleading practices are still eligible for federally subsidized financing.

Absent the ability to get government-guaranteed loans, these schools might go out of business. And they probably should. They seem to spend more resources aggressively signing up students than providing them with a valuable education.

Where does Biden’s school financing overhaul fit in?

Biden has revamped the system known as “income-driven repayment” plans. These cap monthly payments based on the borrower’s income, with forgiveness of the balance granted after a certain period of time. The changes Biden made can reduce how much borrowers pay back. But they may have some unintended consequences.

Among them, said University of Utah finance professor Adam Looney, is that students will be incentivized to take on much more debt because so much of it might be forgiven. “If people expect to repay, say, $60 on each $100 they borrow (some more, some less) a lot of things change,” Looney said via email. “Previously the CBO (Congressional Budget Office) expected people to repay more than $1 for each $1 they borrowed. So borrowing has been the worst way to pay for college. It will instead be the best way to pay.”

And schools are likely to realize they can raise tuition since students will expect to ultimately pay a lower share of it.

There are things the government can do to reduce these risks. It could force institutions to have some skin in the game (such as clawback provisions for underperformers). The government could provide more funding to public postsecondary institutions, particularly those with the strongest track records of graduating low-income students.

But most of all, the government must be choosier about which schools it sends checks to in the first place.