This month, several Democratic lawmakers announced a new Senate push to provide borrowers with more protections while, at the same time, holding colleges and universities more accountable for defaults on student loan repayments.
In a call with Inside Higher Ed and other education media sources, Senators Richard Durbin of Illlinois, Jack Reed of Rhode Island and Elizabeth Warren of Massachusetts highlighted a package of new and existing proposals aimed at reducing the burden of student debt. Durbin acknowledged that the senators had had “limited success” in getting Republican support for the measures, but said they will be a centerpiece of the Democratic agenda in the Senate in 2014.
One of the more controversial new proposals, to be introduced by Reed, would require colleges with high student loan default rates to pay a penalty to the government that is proportional to the defaulted debt.
Reed said the legislation is aimed at holding colleges more accountable for student loan defaults by having them share the risk of those defaults.
“They will have to have skin in the game,” he told reporters. “They will have to make financial judgments based on how well-informed and how reliable their graduates are in terms of paying back their student loans.”
The concept of “institutional risk-sharing for student loan defaults” has previously been embraced, in a range of forms, by some student aid reformers, most recently in a February report by the Institute for College Access and Success.
Reed said that a sliding scale of penalties for colleges as their default rate increases or decreases would provide more direct and effective incentives to colleges than the existing all-or-nothing cohort default rate rules.
Currently, institutions are kicked out of the federal loan program if their two-year default rates are 25 percent or higher for three years or exceed 40 percent in any single year. The most recent national two-year cohort default rate across all sectors of higher education was 10.0 — the highest since 1995. The department is transitioning to a three-year default rate for the upcoming year.
According to Inside Higher Ed, under the new proposal, a college whose student loan default rate reaches 15 percent or higher in a single year would have to begin to pay a penalty of 5 percent of the value of the outstanding defaulted debt. As an institution’s default rate increased, it would have to pay increasingly larger penalties, with a maximum repayment of 20 percent of defaulted debt for colleges whose default rates exceed 30 percent.
The money collected from institutions would be directed toward borrower relief and the Pell Grant Program. The standards would apply only to colleges where more than a quarter of students borrow federal loans. And the bill also provides special exemptions for community colleges and historically black colleges, which recognizes those institutions’ “historic mission” of serving low-income students, Reed said. Warren praised the risk-sharing proposal as good way to better-align “the incentives in the whole system.”
“This is not an indictment of every school out there,” she said. “Many schools are headed in this direction but there are many that are not.”