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We should stop using taxpayer-backed student loans to pick favorites in higher education.
When Education Secretary Betsy DeVos proposed revoking the “gainful-employment” rule last month, critics pounced, claiming that it would “pad the pockets of for-profit colleges,” in the words of Washington’s Senator Patty Murray. In fact, throwing out the rule—penalizing schools whose graduates have lots of debt relative to their earning power—will merely level the playing field. Why should for-profit colleges, the rule’s target, be held to a higher standard than nonprofits, when plenty of for-profit schools provide students with the skills necessary for employment, and plenty of nonprofit schools don’t?
DeVos is on the right track. It’s time to stop using taxpayer-backed student loans to pick favorites in higher education. Let the market do that. After ditching the gainful-employment rule, the Trump administration should next move to eliminate the income-based repayment and loan-forgiveness plans that the federal government offers graduates going into public service. According to a 2017 Congressional Budget Office report, the Public Service Loan Forgiveness program will cost $24 billion over ten years, an amount likely to increase, since almost a quarter of the workforce could be deemed eligible.
Hundreds of thousands of college students graduate each year without incurring any debt. About 30 percent of students—and not just from rich families—manage to leave school with a clean balance sheet, but default rates “among higher-balance borrowers have worsened notably in recent years,” according to a report by the New York Federal Reserve. Indeed, after ten years, “over 70 percent of the original balance has been repaid among those who had borrowed less than $5,000 when they left college in 2006, compared to a reduction of only 25 percent among students who borrowed more than $100,000.”
Working-class students, not surprisingly, were less likely to graduate with debt if they first attended a community college for two years and then transferred, or if they lived at home for their initial college years. But by offering higher grants and loans to students who pick more expensive schools, Washington is putting its finger on the wrong side of the scale, rewarding students for choosing pricier colleges—and making it easier for the colleges to keep hiking tuition rates.
Loan-forgiveness programs are unfair to students who choose less expensive options or get through college by working part-time jobs, and they may also encourage students to study subjects that will result in less lucrative careers. Private colleges are free to charge students less money to major in fields that the university administration believes especially worthwhile; New York University, for example, decided to make medical school free, to liberate future doctors from crushing debt that may steer them away from socially valuable but less-remunerative specialties. If we really want to subsidize public service—from schools to libraries to parks—we should ask taxpayers simply to pay these professions higher salaries.
College administrators reinforce the message that picking a major is a matter of finding your “passion.” Just as with the advice that a successful marriage involves finding your “soulmate,” not much evidence backs up such claims. Some majors are more likely to pay off than others; if the private sector reentered student lending, loan terms would reflect that difference. Private individuals or banks could reach agreements with students, whereby students could sell “shares” of their future earnings. The parties could determine not only which majors are likely to pay off but also which students are the best bets. Schools like Harvard or the University of Michigan could start using their endowments to buy shares of students’ future earnings, instead of investing in exotic hedge funds.
Colleges already know which students are likely to be successful. With access to students’ high school grades, SAT scores, and chosen fields, administrations could make accurate predictions about which students are most likely to pay off their loans. Universities should have some skin in the game when it comes to student loans. If students are likely to default because they were admitted to a school or program where their chances for success are low, or if they’re steered toward easier but less lucrative majors, or if colleges are simply doing a poor job of preparing students for careers, then the institutions should have to absorb some of those costs.
Our political leaders like to talk about “investing in students” with public dollars. It’s time for colleges to start actually investing in students—with their own dollars.
James Piereson is a senior fellow at the Manhattan Institute. Naomi Schaefer Riley is a senior fellow at the Independent Women’s Forum and a visiting fellow at the American Enterprise Institute.
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