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Home›Student Loan›Why not hold schools responsible for unpaid student debt?

Why not hold schools responsible for unpaid student debt?

By Ronald P. Linkous
September 17, 2021
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If you think that the $ 1.6 trillion student loan debt is a looming crisis that will only get worse, there is a simple change that would not only radically improve the student loan system, but also impose market discipline. essential to the entire education sector.

Schools and universities should be held accountable for students who fail to repay their student loans.

Schools currently have little or no in-game skins. Colleges with consistently low graduation rates or high default rates may eventually see their access to federal aid dollars reduced after years of repeated failure. By that time, however, these schools had already collected years of student loan proceeds, grants, interest rate subsidies, and tax breaks – while their former students were forced to pay off thousands of dollars in debt. .

Incentives are powerful things. The current funding system does not impose any price or quality discipline of education on colleges or trade schools. This partly explains why the cost of a college education has increased twice as fast as inflation over the past 30 years. I’m not saying that schools are indifferent to the fate of their former students, but the current system imposes little or no risk on schools.

This type of accountability would strengthen well-run schools offering valuable education at an attractive cost / benefit ratio. As proof, we have the mobile home industry as an example. During the residential mortgage collapse of 2007-08, the default rate on loans issued by Clayton Homes was lower than that on mortgages issued by First Horizon (parent company of First Tennessee Bank). The difference was that the employees of a Clayton Homes dealership are paid – and penalized – based on the performance of the loans they take out. They are encouraged to sell you a house you can afford and penalized for selling you more.

In the same way that financial institutions transfer loan risk to shareholders, universities transfer risk to the federal government.

My suggestion would apply to any school that accepts federal benefits – from Harvard (with its $ 41 billion endowment) to the local cosmetology school. Schools do not need to finance loans from their own resources; the federal government could continue to do so. The only “cost” for a school would be if its students did not repay their loans.

This type of liability would likely not affect most public schools with a high number of students in the state. The three-year default for borrowers in the University of Tennessee-Knoxville federal loan program is 4.7%, less than half the national average of 9.3%. The average UTK monthly payment of $ 207 is less than half of an automobile’s monthly payment of $ 22,000. The most affected for-profit colleges, many of which could not exist without taxpayer dollars.

David Moon, President of Moon Capital Management, can be contacted at [email protected]


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