NAICU Washington Update

New Experimental Sites Initiatives Announcement Planned

December 13, 2019

The Department of Education is planning to announce two new Experimental Sites Initiatives to allow institutions of higher education to receive waivers for their participation in experiments related to student borrowing and repayment. The first experiment allows for the creation and management of income-share agreements (ISAs) and other institutional financing options.  The second experiment would give institutions greater latitude to restrict student borrowing based on a student’s program of academic study (i.e., major) or a student’s potential future earnings. Each of the proposals could prove controversial in the days ahead.
Institutions can apply to participate in either experiment as a standalone trial, or participate in both experiments simultaneously. Participation must be voluntary for students, and students must be given the option to participate in the existing federal student aid programs instead of the experimental programs.
The application cycle is expected to open in the coming weeks when details are officially published in the Federal Register. Experimental sites are authorized under the Higher Education Act (HEA) to offer the Department the opportunity to waive certain requirements of the HEA related to the administration of the federal student aid programs in order to allow for the testing, design, and evaluation of potential future legislation or regulations.
Experiment 1: Institutional Partnerships in Loan Repayment
Participating institutions would be permitted (at the request of the borrower) to create income-share agreements to take on the repayment obligation for a student’s federal loans. The institution would be required to pay the student’s loan balance in full through a lump sum payment or by assuming the repayment obligation on behalf of the borrower. In return, the borrower would repay the institution based on a predetermined methodology, such as by providing the institution a share of the borrower’s earnings. The experiment also explicitly allows for the participation of third-party investment and servicers to administer the institution’s financial program.
The proposal would waive the provision in current law which considers an institution of higher education paying off a student’s loan to prevent default as a defaulted loan for the purposes of the cohort default rate calculation.
Experiment 2: Limiting Borrowing
Participating institutions would be allowed to restrict student borrowing based on a student’s program of study (i.e., academic major) or likely future earnings. While institutions are currently granted the authority to limit student borrowing on a case-by-case basis, such restrictions cannot be based on either course of study or future earnings. It is expected that the proposed experiment will require borrowing limitations to be enforced across all federal Direct Lending programs (Direct Subsidized, Direct Unsubsidized, Parent PLUS, and Graduate PLUS) but schools can vary borrowing limits within programs based on factors such as credential level and the student’s year in the program. However, it is also expected that the proposed experiment will require any decision to limit a student’s borrowing for an academic program to be informed by median program-level earnings of prior graduates published in the expanded College Scorecard, or a similar data source.
The proposal would waive the existing limitations on outlining the case-by-case basis justifications allowing the determination of a student’s need.
Both proposals could face controversy, but for different reasons and from different audiences. 
Income-share agreements have been popular among some Republican policymakers who have seen the proposal as an innovative approach to student debt.  Democrats, however, have generally been opposed because of concern about the ultimate cost to students and the intervention of for-profit investors.  Allowing institutions to set lower loan limits by program of study has long been supported by the higher education community, but the direct linkage to the new, and limited, information on borrower debt on the College Scorecard, could be seen as an inappropriate link between a transparency initiative and public policy. The problem is exacerbated by the Scorecard’s current use of only first year earnings as the benchmark, which is a poor indicator of the ultimate financial return or long-term value of a college degree. The earnings’ year will be adjusted as new data becomes available.

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