NAICU Washington Update

Should Colleges Have to Pay for Their Students’ Education Loan Defaults?

May 29, 2015

The discussion about colleges paying for the education loan defaults of their students continues in Washington.

Senate Committee on Health, Education, Labor, and Pensions Chair Lamar Alexander (R-TN) held a hearing on May 20, 2015, to explore this question. He proposed the concept earlier this spring, when he published a set of white papers seeking comment from the public. (See May 11, 2015 Washington Update

There appears to be bi-partisan interest in this concept. Sen. Jack Reed (D-RI) testified at the hearing describing his bill, Protect Student Borrowers Act of 2015 (S. 1102.). The bill, supported by Sen. Dick Durbin (D-IL) and Sen. Elizabeth Warren (D-MA), would require colleges with at least 25 percent of their students borrowing through the direct student loan program to make “risk-sharing payments” on a sliding scale based on their default rate. Colleges with fiscal year default rates of 30 percent or higher would have to pay 20 percent of the total default amount, including interest and collection fees. Those with lower rates would pay smaller percentages.

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Participation waivers would be provided to Title III and Title V colleges, as well as institutions carrying out student loan management plans, or if the waiver would be in the best interest of the students at the institution. Funds from the risk-sharing would be used for Pell Grants and default prevention. Payment of risk-sharing assessments would be added to the financial obligations under the financial responsibility requirements. Schools would be prohibited from denying access to students seemingly likely to default. Sen. Reed stated that it was “only fair that institutions share part of the risk.”

Witness, citing the small number of problem schools eliminated from the Title IV programs, criticized the current Cohort Default Rate (CDR) as ineffective in lowering defaults because the default rate threshold was so high. Consequently, any actions taken by the Education Department often came long after the defaults took place, and the financial losses weren’t repaid. Andrew Kelly of the American Enterprise Institute, Professor Douglas Webber of Temple University, and Robert Silberman of Strayer College, agreed with Sen. Alexander that the risk-sharing provisions should apply to all colleges no matter what sector, and according to Webber, no matter the level of defaults at the institutions.

Sen. Alexander concluded the hearing by saying the committee is seriously considering putting a risk-sharing provision in the HEA reauthorization legislation. However, he cautioned this must be done carefully because it could result in unintended consequences such as increases in tuition, limiting access, and schools dropping out of the loan program, like several community colleges in Tennessee. He also mentioned additional counseling and limiting borrowing, such as by part-time students, as other strategies for lowering student debt and defaults. Earlier he also suggested that three-year degrees and year-round Pell Grants would help lower costs and debt for students. He wrapped up his remarks noting that while college has never been easy to pay for, it is not as difficult as many think, given the low cost community college option and the grants and loans available.

Sen. Patty Murray (D-WA), ranking minority member, emphasized her commitment to limit the forces leading to “crushing debt” and said accountability was a very important issue for her. For her, accountability included quality, affordability, and student outcomes. While she was worried that risk-sharing might lead to a decrease in access, she also stated that program integrity provisions should be maintained, including the 90/10 rule for “all federal government” aid. Support for the current regulations, including preservation of the CDR, was also mentioned by Sen. Warren, Sen. Tammy Baldwin (D-WI), and witness Jennifer Wang of the Young Invincibles. Sen. Baldwin noted that many colleges are already risk-sharing through their participation in the Perkins Loan Program.