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Third Way Panel Debates Purpose, Unintended Consequences of Risk-Sharing

By Joelle Fredman, NASFAA Staff Reporter

Higher education experts during a panel discussion on Wednesday expressed their concerns about the purpose and goals of risk-sharing — the idea that institutions should be held accountable for some of the loans their students are unable to repay — as well as unintended consequences such as sanctioning institutions that enroll many at-risk students.

The conversation around instituting stronger accountability measures for institutions has traversed the federal government; the Trump administration’s 2019 budget proposal endorsed some kind of a risk-sharing model, calling for a “shared accountability” between the federal government and universities, and Sen. Lamar Alexander (R-TN), who chairs the Senate education committee, released a white paper earlier this month outlining his proposals for reforming federal accountability for higher education in a bill to reauthorize the Higher Education Act (HEA). Alexander’s paper focused on eliminating or changing many current metrics and made some suggestions for measuring an institution’s success in a risk-sharing model.

Additionally, the Department of Education (ED) is in the midst of convening negotiated rulemaking sessions for the gainful employment regulations, and just last week completed a series of rulemaking sessions on borrower defense to repayment  — two Obama-era consumer protection laws that sought to hold institutions more accountable for poor student outcomes and institutional misrepresentations.  

In a paper released last week, “Borrowers with Large Balances: Rising Student Debt and Falling Repayment Rates,” authors Adam Looney, a senior fellow at the Brookings Institution, and professor Constantine Yannelis of the New York University Stern School of Business, argued that students are becoming increasingly slower or unable to repay their loans, which is due in part to more borrowers taking out debt to attend less-selective institutions, where “job prospects and student loan outcomes are worse, and they’re borrowing much larger amounts to do so.”

Looney argued that based on this concerning trend, ED needs to ensure that institutions are held more accountable for their students’ economic outcomes after graduation, such as by assuming some of the responsibility for unpaid loans.     

“As a complement to accountability systems focused on academic success, financial oversight, and labor-market outcomes, a robust risk-sharing proposal would help improve outcomes for students and reduce costs for taxpayers,” Looney wrote in a blog post accompanying the report.

And while the experts on Wednesday’s panel hosted by Third Way, a Washington-based centrist think tank, agreed that institutions should assume more responsibility when it comes to providing their students with the education and skills to succeed economically, they questioned whether instituting a risk-sharing model is the best way to do so.

Tiffany Jones, higher education policy team director at The Education Trust, argued that measuring an institution’s output metrics to determine its success ignores a host of other factors that contribute to students’ performances, such as how many low-income students a school enrolls. When implementing a risk-sharing system, Jones argued that “we need to take context into account” in order to avoid penalizing schools for educating underserved students, and to ensure that they continue to do so.

In a letter NASFAA sent to Alexander in response to his white paper, it stressed a similar concern about such a system disincentivizing institutions from enrolling at-risk students.

NASFAA argued that community colleges, for example, often have open enrollment policies and that a poorly designed system could create a “perverse incentive of increasing the number of institutions (most likely community colleges) that choose not to participate in the federal loan programs, choking college access to thousands of students who would not be able to attend without those dollars.” Further, NASFAA cautioned that schools that are already more selective with their students may increase their selectiveness to shut out risky populations.

Nick Hillman, an associate professor of educational leadership and policy analysis at the University of Wisconsin-Madison, compared risk-sharing to his research on states that adopted performance-based funding policies, which he has found to disproportionately hurt minority-serving institutions (MSIs) that enroll at-risk populations and not improve student outcomes. He argued that the government should move away from high-stake incentives, and instead use this opportunity to collect data on institutions to measure their success and help students better navigate higher education.

Matthew Chingos, director of the Urban Institute's Education Policy Program, rejected the concept of a risk-sharing system, calling it “a bad idea” because schools often do not have control of their students’ repayment rates, and such a system would not serve struggling students today.

Chingos argued that if schools would be required to report their students repayment rates after five years and receive sanctions if they do not meet a certain threshold — which has been discussed among policymakers and detailed in a popular risk-sharing proposal dubbed “The Hamilton Project” — then even schools that have taken steps to improve their students’ outcomes will continue to be flagged for poor performance until its new cohort of students reaches five years of repayment.

Instead of a risk-sharing model, Chingos proposed more short-term solutions to correct poor-performing institutions. When schools experience students dropping out, for example, they should make efforts to support them, such as taking attendance in classes. He suggested that if Congress insists on instituting a risk-sharing system, it should allow some flexibility for ED to change metrics and thresholds if it finds that they do not properly reflect institutions’ success.

NASFAA also suggested that the committee abandon the idea of sanctioning institutions and instead urged Alexander to use incentives rather than punishments to flag schools in a risk-sharing model, such as by rewarding schools with more federal funds if they graduate a certain number of Pell Grant recipients.

“Negative and punitive risk-sharing measures do not recognize the complex reasons for failure,” NASFAA wrote.“... Institutions have a vested interest in the success of their students, but to tie financial incentives or eligibility for federal aid dollars to the repayment behavior of its current and former students, as some proposals have suggested, can be problematic.”

 

Publication Date: 2/22/2018


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