Alexander Report on Risk-Sharing Calls for Realignment, Improvement of Federal Incentives

By Joan Berkes, Policy & Federal Relations Staff

On Monday Sen. Lamar Alexander (R-TN), chairman of the Senate Committee on Health, Education, Labor and Pensions (HELP), released white papers in an effort to focus attention on three topics related to the upcoming reauthorization of the Higher Education Act: student consumer information requirements, risk-sharing in the student loan programs, and accreditation.

The Senator has requested public comment by April 24 on these papers. NASFAA will submit comments, and in turn would like to hear from you. Please send your comments to policy@nasfaa.org.

Report on Risk-Sharing

This white paper calls for a realignment and improvement of federal incentives “so that colleges and universities have a stronger vested interest and more responsibility in reducing excessive student borrowing and prioritizing higher levels of student success and completion.” The report adopts a strategy of designing “market-based accountability policies that require all colleges and universities to share in the risk of lending to student borrowers.”

The report asserts that the Department of Education does not maintain any underwriting standards for undergraduate loan programs and that, for the most part, the same amount of loan money is available to students regardless of their program of study or financial need. It considers the federal investment in access (approximately $138 billion for fiscal year 2015, including grants and loans) important in helping students attend the institution of their choice. However, easy access to federal aid “may have helped create an environment of over-borrowing and pricing that is becoming increasingly disconnected from a student’s ability to repay” and federal policy “has few, if any, consequences for institutions that leave students with mountains of student debt and defaulted loans.”

While reaffirming the focus on ensuring access, the report also supports “a reasonable expectation that institutions of higher education maintain a greater stake in, or are better aligned with, their students’ success, debt and ability to repay.”

The report identifies the following issues as representative of a misalignment in incentives among institutions, taxpayers and the federal government, and in need of attention in the upcoming reauthorization of the Higher Education Act.

  • Generous cost of attendance policies can allow for significant student debt unrelated to tuition and fees
  • Some institutions have high cohort default rates 
  • Taxpayers and students bear the burden and consequences of default 
  • Some institutions have low student completion rates

The report finds that current federal policies intended to address negative incentives associated with generous student aid programs “generally are not well-focused, represent top-down government mandates, and are enormously complex in design and implementation. Some policies only focus on a certain sector of institutions instead of holding all schools to the same standards.” Cohort default rates are especially singled out as “ineffective in altering institutional behavior,” with uneven and inconsistent enforcement. The report also details problems with gainful employment metrics and the 90/10 rule.

The report proposes that federal law should instead provide "market-oriented systems that enable these institutions to lower student borrowing yet still be held accountable for financial risks to students and taxpayers. This new set of policies may be considered risk-sharing or skin-in-the-game." 

The report envisions that such policies would encourage appropriate admissions practices for at-risk or uncommitted students, motivate students to complete more quickly, and graduate students with less debt. They could incentivize free “trial programs” for at-risk populations needing remediation or seemingly uncommitted students who may benefit from limited borrowing opportunities. Under risk-sharing policies, the report asserts that Institutions can minimize their risk by deploying more resources into academic or other support services to drive on-time completion, success, and ultimately repayment of loans.

The report examines a number of possible structures for risk-sharing:

  • Shared liability by institutions for repayment of loans, which would have to consider factors such as which institutions would be held liable (all or only those who meet certain triggers), what metric would be used to determine liability (e.g., some variant of default rates or repayment rate), what the trigger that imposes liability would be, what the actual liability would be.
  • Loan guarantees on completion/retention, under which institutions would guarantee a percentage of the loan amount for current students.
  • Cost structure, under which institutions assume different liabilities based on the loan amount associated with some portion of an institution’s cost of attendance.
  • Federal student aid insurance fund, under which institutions would pay a yearly premium into an insurance fund based on a percentage of the institution’s previous year’s volume of federal financial aid – Pell Grants and federal student loans – and other risk factors such as student withdrawals and non-completions. This up-front payment would increase or decrease each year based on a variety of risk factors.

The report acknowledges that other factors need to be considered in the development of a risk-sharing approach, including a lack of institutional control over the entitlement nature of loans, unintended consequences in admissions practices that could hurt at-risk students, and challenging labor markets and business cycles that are outside of an institution’s control.

 

Publication Date: 3/25/2015


Peter G | 3/25/2015 1:28:41 PM

As a quick point, it would have been useful to have a link to the actual text of Alexander's release here.
IHE is hosting a copy here https://www.insidehighered.com/sites/default/server_files/files/Risk%20Sharing2.pdf but there's probably a more direct link to the file off a congressional site.

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