Risk-Sharing Legislation A Possibility During Higher Education Act Reauthorization

By Katy Hopkins, Communications Staff 

Institutional risk-sharing -- or holding schools partially accountable when their student borrowers default -- could both control college costs and reduce student debt, Sen. Lamar Alexander (R-TN) said during a hearing Wednesday. And it’s one measure the Senate Health, Education, Labor, and Pensions (HELP) Committee will consider including during reauthorization of the Higher Education Act to help curb excessive student borrowing, he added. 

The hearing, “Reauthorizing the Higher Education Act: Exploring Institutional Risk-sharing,” was the third HELP installment ahead of reauthorization, and featured the following panelists: 

  • Sen. Jack Reed (D-RI),
  • Andrew P. Kelly, director of the Center for Higher Education Reform at the American Enterprise Institute,
  • Robert S. Silberman, executive chairman, Strayer Education, Inc.,
  • Jennifer Wang, policy director at Young Invincibles, and 
  • Dr. Douglas A. Webber, assistant professor at Temple University.

“Right now, colleges receive the upfront benefit of money provided by federal student loans, but students and taxpayers are the ones who bear all the risks and consequences of default, regardless of whether the college or university serves students well or keeps debt levels affordable,” Sen. Patty Murray (D-WA) said. 

Risk-sharing could give colleges incentives to keep costs down, which, in turn, could reduce student borrowing, Alexander said. If implemented, Alexander said the policy should apply to all institutions -- though various institution types may require different models of risk-sharing. Policymakers would need to prepare for and mitigate against unintended consequences, he noted, such as additional community colleges exiting the federal loan program. 

Risk-sharing could also spur colleges to limit their enrollees to students who appear to be low risk (i.e., not low-income) and thus could stifle access, Kelly said. To combat this, schools could be incentivized with bonuses for each Pell Grant recipient they enroll and ultimately graduate, he suggested.

Reed has already introduced legislation on institutional risk-sharing meant “to move the conversation forward … to how to design a system that puts the right market incentives in place,” he said. 

Overall, the panelists largely supported the premise of risk-sharing, though they noted some caveats. Colleges are currently somewhat constrained because they can’t limit overborrowing among categories of students, Kelly and Silberman said -- an authority for which NASFAA has long advocated. 

Sen. Tammy Baldwin (D-WI) asked whether the Perkins Loan Program could be built upon to achieve risk-sharing goals -- an argument NASFAA President Justin Draeger recently made in The Chronicle of Higher Education -- given that colleges already contribute $.33 for every $1 from the federal government.

“The broad structure of the Perkins Loan Program absolutely could be used as a basis for risk-sharing,” Webber agreed. 

In addition to risk-sharing, the HELP Committee will likely consider how to make it easier for colleges to offer more student loan counseling -- a service that’s often lacking due to heavy administrative burdens on aid offices, a recent NASFAA study found. The HELP Committee may also consider giving colleges authority to limit some borrowing. 

Alexander concluded the hearing with some perspective: Much of education is attainable through federal aid, particularly at community colleges and public institutions where costs tend to be lower, he said. 

“Sometimes, I think we send the wrong message to students of all ages who want to go to college. It’s never easy to pay for college, but it’s easier than many people say or think,” he said. “There are many things happening to make college accessible to students, and perhaps risk-sharing could be one more.” 


Publication Date: 5/21/2015

Anthony M | 5/21/2015 5:32:57 PM

Of course legislators are not going to do the right thing, they are going to make the politically popular choice. Look what happened when they tried to tighten up the PLUS program, the backlash was immediate because the government was now trying to pull the rug out from some families (read HBCU) whom they've made dependent on these loans. They've created a monster (especially by not allowing FAAs the authority to limit borrowing) and now want to blame schools for their mistakes. If there are any additional burdens placed on schools, the answer will be to exit the federal loan program and turn to private lenders, who have tightened up their underwriting and will give loans to those who demonstrate the ability to pay them back. In other words, it will kill the federal student loan program, just as Perkins gasps for its final breaths. Oh, duh, that's probably exactly what the current Congress would like to see. More profits for their constituents, the banks. Sickening.

Ashraf M | 5/21/2015 5:14:39 PM

I once worked at a school where the Pell grant and state aid combined were sufficient to cover the student’s expenses. But I would still have students who would insist—despite repeated loan counseling, and its attended warnings—to borrow up to the maximum limit in order to generate a refund check, while needlessly incurring thousands of dollars student loan debt during their time in school. Not surprisingly, the school’s default rate was between 10% and 15% percent every year.

I do not see how this proposed risk-sharing would put a stop to this practice? It simply doesn’t address the real reason students over-borrow, which is the students themselves are choosing to go into debt without regard to consequences.

Real default management should mean that schools have the flexibility to say ‘no’ to a student borrowing a loan unnecessarily—because an unnecessary student loan is an irresponsible student loan.

Kris O | 5/21/2015 1:47:36 PM

It is ludicrous to blame Financial Aid Offices and colleges for student loan default when we are neither the lender nor the borrower. It's like blaming the realtor when someone defaults on a home mortgage loan. We do not set the rules and are given exactly zero ability to limit loan funds to eligible students who we feel are at-risk of default, but then when they do default the federal government wants to foist the blame on us. Smells like scapegoating to me. This is worst in a long string of horrible student aid legislation to come out of Washington yet.

Joel T | 5/21/2015 12:20:26 PM

It's somewhat troubling that people are so out of touch are making the policy decisions.
Risk sharing is not the answer. More loan counseling isn’t the answer either, in my opinion. Students are being afforded the opportunity to take loans as a ‘quick fix’ for a financial struggle or live the life they've never been able to. That's the problem, and we never really address the underlying problems that may exist (ex. living like a monarch on a student's budget, already under too much debt, living outside of their means, etc.) and how they student loans are only compounding the issue.
As long as students are allowed to take the full amounts simply because they’re a warm body and taking 6 credit hours, the problem will never improve. There’s no pressure or reason for it to improve because the counseling won’t deter those that do not care. They’re just going to check the boxes, answer the questions, and say “Give me my money.” Colleges can't browbeat students into not doing something if they know they can, so passing the risk on to us is a fallacy in and of itself since we are constantly trying to lower the risk anyway.
I, personally, am a proponent of loan proration (like with Pell) based on enrollment and giving aid administrators the ability to deny or reduce loans based on SAP progress (ex. Warning) or a student being a R2T4 the prior semester. But – that’s me. I think if you start to cut or reduce your liabilities in a proactive manner the issue will be reduced greatly.

Mary-Frances C | 5/21/2015 11:3:23 AM

What we need is the flexibility to limit cost of attendance - for example exclude living expenses for online students.
Allowing schools to implement controls like this is what will decrease overborrowing.

Cynthia B | 5/21/2015 10:20:40 AM

It is disturbing that many in the political arena do not understand institutional risk sharing already in place. I advocate for authority to reduce, limit, or at a minimum to award loans based on enrollment levels in every venue possible. Maybe our senators need to spend time in financial aid offices.

Antony O | 5/21/2015 9:45:39 AM

Sen. Patty Murray clearly has no idea what she is talking about in regards to institutions not being held accountable... What a joke

Lynn S | 5/21/2015 9:44:00 AM

I don't see why institutions are held responsible for default rates AT ALL. The servicers are the ones tasked with managing the loan accounts, explaining and processing repayment options, and doing skip-tracing -- and as the research continues to show, they have almost zero incentives to do a good job. Institutions are in effect being held directly responsible for servicer failures....

And then these servicers have the nerve to email us administrators about their ridiculous "contests" - asking us to get more borrowers to sign up for online account access, auto debit, etc. In other words, they're using "school competitions" to make us trip all over ourselves trying to do even more of their work for them, as if we're not already massively over-burdened.

Joy K | 5/21/2015 9:5:02 AM

We are already risk-sharing based on our default rates. If the government would give us more ability to limit loans to students at the school level, we could much more effectively manage our loan default. Our hands are tied, but it's all our fault....please.

Sharon M | 5/21/2015 8:42:13 AM

I think it is incorrect to say the institutions bear none of the consequences of default when you factor in the due diligence of tracking and communicating with borrowers who are long gone from the college as well as the sanctions already in place.
I also, believe that focusing on the back end of the problem with repayment plans and risk sharing does not alleviate the problem if those of us in the financial aid trenches do not have more tools to use to prevent over borrowing. Things like a separate aggregate for 2 yr college students and awarding based on enrollment status to keep loan dollars down would benefit us all. Professional judgment guidance I have heard makes no sense when someone tells us they don't recommend refusing to originate a loan for a previously defaulted borrower based on rehabilitation. Many students seem to do what it takes to get the dollars in hand.

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