Risk-Sharing / "Skin-in-the-Game"
Risk-sharing by colleges is being promoted by policy makers on both sides of the aisle as a way to make colleges share liability for the cost of their students’ loan defaults. The theory is that colleges would have “skin in the game,” and would therefore make sure their students succeed in order to avoid financial losses. This also has been advocated by some policymakers as a mechanism to reduce student loan borrowing and defaults. While some of this thinking has been focused on correcting abuses in the for-profit sector, the legislation introduced would apply to all sectors.
Efforts to require colleges to assume liabilities based on the amount of federal loans awarded to enrolled students could harm the very students the policy is intended to help. In anticipation of added expense, institutions with limited resources would be forced either to increase tuition or limit enrollment of low-income students. The policy could also negatively impact institutional balance sheets and the financial rating of colleges, including adding to the likely number of schools that fail the federal Financial Responsibility Standards.
Moreover, the proposals ignore the fact that private non-profit colleges already have ”skin-in-the-game” in the form of the significant institutional student financial aid provided to students. According to the College Board’s Trends in Student Aid 2014, nearly two-thirds of all student aid awarded at private, nonprofit colleges comes directly from institutional resources. In addition, private nonprofit colleges match, and often over-match, contributions to the campus-based programs.