The White House is considering giving universities responsibility to pay for part of the losses on student loan defaults. This policy would incentivize colleges to get students good jobs, hopefully, reduce default rates for borrowers, and boost the rate of return on the loans for the government.
While getting better jobs for students is a worthwhile goal, there is little reason to think the new incentives would help. Universities already try hard to get students to graduate and secure good jobs, yet many students continue to fail out. Despite the big pay bump from earning the diploma, many students cannot graduate. It’s hard to think there is much slack to get more students to cross the finish line without lowering standards.
Moreover, it seems unreasonable to ask universities to help cover risks the government took on by making risky loans. The government made bad loans; they should bear the risks. Colleges have indeed benefitted from loose loan financing, but if the government thinks students aren’t spending the loans wisely, they could add conditions to the loan. For example, lend only to students who are likely to graduate or study a practical major. Offering loans loosely, then asking universities to help cover the losses seems like a roundabout way of getting good loan outcomes.
If universities were forced to pay for part of default losses, they would probably restrict access to low-ability students. Or charge low-ability students higher prices to compensate for the higher default risk. This change would effectively shift the task of assessing creditworthiness to the universities. Sticking universities with the task of assessing credit risk seems especially unfair to universities because assessing creditworthiness and denying applicants is unpopular; it looks mean. The government would be getting the unpopular task off their hands.
Moreover, offering loose loans hurts many people it’s designed to help. Many bad students will predictably fail and face large debts they cannot repay. It both costs a lot of money and hurts people. Hardly a charitable act.
It would be more prudent for the government to offer loans only to students who are likely to repay and couldn’t afford it otherwise. For talented but poor students, the loan will likely pay off for both parties. For untalented students, a loan would probably cause heartache. Even though it sounds terrible politically, more prudent lending would avoid giving students debt they can’t afford. It also would save money for taxpayers and still provide opportunities for talented students who need it.