A5
THE ASTORIAN • SATuRdAy, JuNE 8, 2019
PRO-CON
Should colleges foot the bill
when students default on loans?
Brian Davies/The Register-Guard
University of Oregon graduates make their way through campus during the traditional Duck Walk preceding graduation ceremonies in Eugene in 2013.
PRO: US taxpayers
CON: Holding colleges
shouldn’t get stuck with
responsible won’t
a $1.5T loan default tab
reduce loan defaults
A
THENS, Ohio — Not only have
have some “skin in the game.”
45 million U.S. college students
As the noted financial scholar Alex
racked up more than $1.5 trillion
J. Pollock, former president and CEO
in loan debt — more than the total for all
of the Federal Home Loan Bank of Chi-
cago, suggests: Make the schools pay
outstanding credit card or car loan debt
20% of the debt obligations of former
— more than 5 million student borrow-
ers are delinquent or in default on their
students facing loan delinquency or
loans, and an even larger number have a
default.
loan deferment or “forbearance” — that
The schools have put a burden on
is, they’ve been given permission to tem-
American taxpayers already facing long-
porarily not repay their debt.
term severe financial consequences from
This massive record of nonpayment
the massive $22 trillion federal debt.
far surpasses that found for pri-
Having exacerbated the problem,
vate debt such as home equity
make them pay at least some of
loans, car loans or credit card
the costs.
obligations. Literally hundreds of
Doing this would have enor-
mous positive effects. Colleges
billions of dollars in obligations
would be incentivized to admit
are at risk of nonpayment.
fewer academically unquali-
What to do? While some non-
fied students, reducing the emo-
payment of loans results from
RICHARD
tional and financial pain and dis-
tragic unforeseen circumstances
VEDDER
tress faced by individuals who are
such as illness or the death of a
better off pursuing other options
parent, a very large portion of it is
rather than college.
highly predictable and avoidable.
The Government Accountability
U.S. colleges and universities admit
Office acknowledges that federal stu-
many students who have very dubious
dent loan programs are a financial drain
prospects of graduating and/or of earning
on the federal budget and the “skin in
sufficient amounts of money upon finish-
ing college to be willing or able to repay
the game” proposal would dramatically
their loan obligations.
reduce and possibly end it.
Why is this the case? Colleges, hun-
Wouldn’t the financial burden associ-
ated with this proposal threaten the exis-
gry for the tuition revenue students pro-
tence of some colleges? It would, but
vide — and often for additional state
that should be viewed as a positive.
government assistance tied to that enroll-
ment — often knowingly admit students
In the private market economy, the
with very low prospects for graduation.
principle of “creative destruction” moves
There are zero incentives for schools not
resources to more valuable uses as com-
panies close down or are forced to
to admit these individuals, but positive
restructure for not adapting to changing
inducements to accept them.
tastes or potential efficiencies.
Yet for large portions of these stu-
dents, attending college leads to bitter
The “creative destruction” principle
disappointment and financial hardship:
is needed in higher education as well,
They fail to graduate, thereby becom-
where colleges use government subsi-
dies and private philanthropy to cushion
ing stigmatized as academic failures, and
themselves from market forces.
they pile up debt obligations that are not
As falling birth rates lead to declining
even dischargeable in bankruptcy.
enrollments in coming years, the “death”
How can we dramatically reduce this
of schools that fail to provide high value
problem? The creators of the problem
to their students should be welcomed.
are largely colleges and universities that
Skin in the games will help achieve that
knowingly admit large numbers of prob-
lematic students. We need to change the
needed transition to fewer but more
incentive system, making schools face
effective universities.
financial consequences for accepting stu-
Richard Vedder is a senior fellow
dents with shaky academic backgrounds
at the Independent Institute and distin-
guished professor of economics emeritus
who are unlikely to complete college.
at Ohio university.
Put more colloquially, colleges need to
R
ALEIGH, N.C. — For many
prepared for or interested in higher
years, education policy experts
education.
whom I respect have argued in
National Review writer Kevin Wil-
liamson nailed the truth in his recent
favor of making colleges have some
article, “An Idea for Student Loans:
“skin in the game” with regard to stu-
dent loans. That is, they should have to
Get Rid of Them,” saying that the cur-
rent system is just “a conveyor belt for
bear at least some of the loss if a stu-
dent they accepted later defaults on his
carrying government money into the
federal loan.
universities.” It has enabled colleges to
That would be a step in the right
spend far more than in the past, while
direction, but it doesn’t solve the
actually educating far less. The only
problem.
way to stop the waste, of which stu-
dent loan default is only the
Sound finance is based on
most visible evidence, is to
the principle that the party
close down what he calls the
extending credit should be the
Bank of Uncle Stupid.
party who suffers the loss if the
Federal college subsidies
loan goes sour. That keeps lend-
ers alert to the borrower’s cir-
through loans and grants was
cumstances. If the risk seems
one of the many bad ideas of
too great, the lender will just
President Lyndon Johnson’s
GEORGE
say, “We don’t want to make
Great Society. In fact, there is
LEEF
this loan.”
no provision in the Constitution
That’s not how it works in
that authorizes the federal gov-
ernment to loan or give money to col-
higher education, because colleges
lege students; but back in the 1960s,
typically are not the lenders.
no legal challenge to any expansion
If colleges did lend to their students
of government was taken seriously.
(and there is no reason why they can’t,
Once the faucet of federal money was
but it is unusual), then they should and
opened, politicians just kept opening
would bear the risk of defaults. But the
it more.
“skin in the game” policy is rooted in
The massive amount of student debt
the assumption that the federal govern-
ment will continue lending to students,
and increasing default rates has people
and then the colleges that accept these
thinking about the issue, but the ideas
students — and government money —
being floated either would make only
would have to pay back some percent-
a slight improvement (like “skin in the
age of the loss if the student can’t or
game”) or would make it much worse
won’t repay.
(like the proposals to make college
That probably would make col-
“free” and forgive the debt of many
leges more careful about which stu-
students).
dents they accept and also cause them
Our higher education system was
to rethink their curriculum and stan-
far more sensible and efficient before
dards. This would improve the incen-
the federal government began subsi-
dizing it. We need to undo that mis-
tives somewhat, but some (probably
take. But that won’t happen until
most) of the losses would still fall on
America realizes that the flow of fed-
taxpayers, so college officials will con-
eral money into higher education has
tinue accepting academically marginal
transformed it for the worse. Turn off
students in hopes that they’ll pay back
the faucet.
their loans.
George Leef is director of research
For a fair number of colleges, turn-
ing away any students is unthink-
at the James G. Martin Center for
able due to their precarious financial
Academic Renewal, a higher educa-
tion reform organization.
position.
We need to get at the root of the
problem, which is that readily avail-
able federal grants and loans lure
many people into college who are not