Should colleges bear some student default responsibility?

Stories and commentary in the New York Times this week focusing on student loan defaults paint a grim picture of the fallout from heavy borrowing for school.

All true, but what to do about it?

Among all the Times commentaries, my favorite came from Kevin Carey, policy director with the research group Education Sector. He argued persuasively that the colleges should bear more responsibility for student debt problems.

Colleges get paid upfront. Since the large majority of student loans are issued by the federal government, bad loans leave students, parents and taxpayers footing the bill.

And while federal law penalizes colleges with unusually high loan default rates, the provisions are so lenient that only the most egregious bad actors are ever caught. Essentially, colleges have carte blanche to put your tax dollars at risk.

What if the college itself had to reimburse taxpayers for part of the losses? They might think twice before offering students financial aid packages that are like weapons of personal financial destruction.

If it’s any consolation, it used to be much worse. Interest rates and defaults on student loans were dramatically higher 20 years ago.

“While rates have risen considerably, they are still well below rates of the early 1990s. Rates as high as 20 percent were not uncommon, particularly among public and for-profit, 2-year institutions,” the Federal Reserve Bank of Minneapolis reminded me recently.

There are a number of reasons for the higher default rates back then, including much higher interest rates on loans. But a bigger reason is simply that they could be higher–there were no penalties on institutions whose students defaulted.

That changed in 1991, when Congress required that colleges keep cohort default rates below a particular threshold–35 percent initially, 25 percent eventually. Failure to comply over a 3-year period meant their students would no longer be eligible for federal student aid.

By 1997, more than 1,000 educational institutions nationwide had lost eligibility.

Here it is from the Fed in chart form:


— Paul Tosto