How to Recover From the College Admissions Scandal: Restore Confidence With Student Loan Innovation

COMMENTARY Education

How to Recover From the College Admissions Scandal: Restore Confidence With Student Loan Innovation

Apr 5th, 2019 2 min read
COMMENTARY BY
Mary Clare Amselem

Policy Analyst

Mary Clare is a Policy Analyst at The Heritage Foundation.
One alternative to federal loans would be income share agreements. SunnyGraph/Getty Images

Key Takeaways

The recent college admissions scandal has only reinforced long-standing suspicions that the admissions process is rigged.

At the heart of the problem is the federal government’s near-monopoly on student loans.

The college admissions scandal has rightfully given everyone cause to rethink whether colleges and universities are worth our financial investment.

American colleges and universities have a growing credibility problem. The recent college admissions scandal has only reinforced long-standing suspicions that the admissions process is rigged.

Meanwhile, the schools churn out more and more graduates burdened by massive student loan debt who are all too often unprepared for success in the job market. The Center for College Affordability and Productivity reports that nearly half of all working college graduates are in jobs that don’t require a college degree.

Although students, taxpayers, and parents are rightfully questioning whether college is worth the ever-rising tuition, colleges for the most part have made no moves to demonstrate a commitment to delivering value for money. That’s because colleges face few consequences for providing low-quality education.

Instead, Washington gives them a blank check that insulates institutions from being held accountable. Colleges have little incentive to ensure their graduates are happy with their education once they walk off campus.

At the heart of the problem is the federal government’s near-monopoly on student loans. Reduce reliance on federal loans and make schools have some skin in the game, and colleges will become more accountable. Paying for school will become more manageable as well.

One alternative to federal loans would be income share agreements. Students entering these agreements would have the cost of their education covered up front, by either the school or a private lender, and agree to pay back the cost of their education from a fixed percentage of their future earnings.

This idea is not necessarily new, but its practical application is. More than 60 years ago, economist Milton Friedman argued that having lenders co-sign a student’s debt would ensure both mutual benefit and risk between student and the lender.

Purdue University has already opted to offer this arrangement to students. Under its “Back a Boiler” plan, students can sign a contract agreeing to reimburse the school for their education by paying a percentage of their post-graduate earnings. This saves a student from entering unmanageable debt.

Moreover, it offers unparalleled transparency in terms what the student can expect in return. Purdue, for example, would tell a student entering that program what they would expect the student’s starting salary to be upon graduating with a certain major.

Imagine if all colleges started advertising the expected starting salary for students who graduate with a women’s studies degree? My guess is we would have far fewer women’s studies majors, which might not be that bad.

There is not much stopping more universities from following Purdue’s example and starting an income share agreement program, except for this: The status quo is a good deal for universities. Institutions of higher education have no incentive to offer more attractive financing options for students as long as Congress continues to fund them through the costly federal loan programs. As Congress considers reauthorization of the Higher Education Act, reducing federal lending and making space for alternative financing options to emerge should be a top priority.

Reps. Mark Green, R-Tenn., and Vincente Gonzalez, D-Texas, recently introduced bipartisan legislation that may encourage more schools to utilize this innovative funding model. The “Kids to College Act” would streamline the process for schools to partner with private lenders to create income share agreements. The legislation would also create a framework for the IRS to interpret these agreements. This innovative legislation would be an encouraging first step in making ISAs readily available for Americans entering college.

The college admissions scandal has rightfully given everyone cause to rethink whether colleges and universities are worth our financial investment. ISAs offer our best bet to hold colleges accountable and protect taxpayers if a student is unable to pay off his or her loan. At a time when our country is $1.5 trillion in student loan debt, Americans deserve bold reforms to fundamentally change how we think about paying for college, and ISAs could be a golden ticket.

This piece originally appeared in The Washington Examiner