Michael L. Hays, Ph.D., sent this interesting suggestion to address the problem of student debt. I was reminded when I read it that this issue came to a head in 1972, when Congresswoman Edith Green from Oregon fought for the idea below, that is, sending federal money to colleges to use for need-based scholarships. On the other side from Green was Senator Claiborne Pell, who advocated direct federal loans to students, not to institutions of higher education. Pell won and created the Pell Grant program, which some have likened to a voucher for higher education. Now these issues are being reconsidered as Presidential candidates debate what to do about the soaring cost of higher education and the crushing burden of debt that so many students carry.
Recent campaign proposals to address the problems of student debt called my attention to the context of those loans and the mechanisms for making and collecting them. What struck me was that these proposals do not address the problems but oblige the federal government to spend hundreds of billions of dollars without any suitable means to evaluate the merits of its expenditures or to control them.
At present, students borrow money from a variety of sources, mainly the federal government. Colleges receive this money, apply it toward their students’ expenses, and let their graduates repay their loans to the government. Colleges have no reason to limit the number of students whom they admit, to maintain their admission and academic standards, to ensure the quality of education provided, or to moderate their tuition or fees. Students assume all the risks of those loans, even as, in too many cases, colleges engage in essentially predatory practices, especially for-profit schools which would otherwise not exist. In short, colleges have no stake in the entire process except for latent incentives to exploit easy government loans to students.
We need to put college funding on a sensible basis. The government should not lend money indiscriminately to anyone who wants it for college: serious students, students unsure of their purposes, students for whom college is a substitute for unemployment, students who want a two- or four-year vacation, etc. Instead, it should lend to colleges on their demand for funds; in turn, the colleges would make loans to students whom they believe, on the basis of their already existing application processes, likely to benefit from college and to repay their loans; in turn, the colleges would use their repayments to repay the government. Schools would assume the costs of their mistakes—perhaps some small allowance (ten percent?) for the inevitable mistakes—; otherwise, states would be guarantors of the loans of public colleges and universities. Private, especially, for-profit schools, would also assume the costs of their mistakes and require private-equity guarantors of their loans. For-profit schools, usually living off the federal dole and providing a poor education, would be forced to up-grade themselves or would drive themselves, or be driven, out of business.
The benefits of this approach to college funding are many. Colleges would face the risks of real consequences of excessive borrowing and reckless lending. To minimize or avoid these risks, they would focus on and improve the standards and quality of the education which they provide (not least by putting a brake on lowering academic standards and inflating grades), select students better matched to and suited for those standards and not admit others to swell enrollments for purposes of institutional and budgetary growth, and restrain increases in tuition and fees. As a result, their graduates would be more likely to get jobs and repay loans not inflated by unrestrained costs.
By requiring colleges to decide on these “small business loans” for students, the government could attend to ensuring that colleges do not “red line” certain populations.
The disadvantages of this approach are few and easily offset. Initially, a small downward shift of some students with weak backgrounds, admittedly, disproportionately minorities, to lower-ranked colleges would be compensated by the greater chance of their academic success, their increased graduation rates, and their better chances of employment and loan repayment.
The important points are that the government, after a one-time start-up fund for loans and some modest annual appropriations to maintain funding to serve demand (and supplement some loan defaults), would not incur large and uncontrolled expenses; students would have more assurance of getting the education for which they pay; and colleges would have incentives to do a better and more economical job of educating their students.
Dr. Michael L. Hays
Las Cruces, New Mexico