Time for colleges to pay, Dem ‘swells’ ‘blinded by privilege’ and other commentary

Published in the New York Post:

Ed desk: Time for Colleges to Pay

“It’s time that the cost of nonpayment of student loans be shared” by “colleges and universities themselves,” argue Arthur Herman and Alex J. Pollock at The Hill. Schools now “get and spend billions in borrowed money and put all the loan risk on somebody else,” which “incentivizes them to push” costs “ever higher — by an average of 169 percent since 1980.” We need a “model that realigns incentives and rewards,” and “the first principle should be that the more affluent the college is, the higher its participation in the losses should be.” Joe Biden has shifted $132 billion “of student debt from borrowers to taxpayers.” “It’s high time to give the rest of us a Christmas present of a new model for government student loans.”

It’s time for universities to share the burden of student loan defaults

Published with Arthur Herman in The Hill.

While the nation is rightly worried about the proliferation of antisemitism on its college campuses, another higher education abuse also needs prompt attention.

On Dec. 6 – St. Nicholas Day – President Biden handed student loan defaulters another $5 billion gift in debt forgiveness. The administration’s eagerness to win the votes of student loan borrowers by shifting the cost of student debt from borrowers to taxpayers now adds up to $132 billion of student loans those borrowers will not have to pay — even though the Supreme Court ruled a related scheme unconstitutional last June.

But if borrowers don’t pay the debts they incurred and default on their debts, someone else has to pay. Right now, that someone else is American taxpayers. Now it’s time that the cost of nonpayment of student loans be shared by those who have benefitted the most directly from federal student loans: namely, the colleges and universities themselves.

By inducing their students to borrow from the government, higher education institutions collect vastly inflated tuition and fees, which they then spend without worrying about whether the loans will ever be repaid. This in turn incentivizes them to push the tuition and fees, and room and board, ever higher — by an average of 169 percent since 1980, according to a Georgetown University study.

In short, in the current system the colleges get and spend billions in borrowed money and put all the loan risk on somebody else — including those student borrowers who responsibly pay off their own debt and those who never borrowed in the first place, not to mention taxpayers, whether they attended a college or not.

This perverse pattern of incentives and rewards must stop. A more equitable model would insist that colleges have serious “skin in the game.” It would insist that they participate to some degree in the losses from defaulted and forgiven loans to their own students.

This idea has been thoughtfully discussed and proposed in Congress before, but now is the time to implement a model that realigns incentives and rewards in our national student loan system and distributes the burden of risk more equitably.

The first principle should be that the more affluent the college is, the higher its participation in the losses should be. The wealthiest colleges with massive endowments should be covering 100 percent of any losses on federal loans to their students, which they can easily afford. Others can cover a lower, but still significant, percentage, but every college that finances itself with federal student loans should assume some real cost when its students default on their loans. Four million student loans enter default each year, not counting the Biden scheme for student loan “forgiveness,” which creates even more losses.

Specifically, we propose the following “skin in the game” requirements for colleges on losses from federal student loans to their students, based on their endowment size:

Endowment Size     Cumulative Rank in Endowments   Coverage of Losses

Over $10 billion                           Top 0.6%                                          100%

$5 billion to $10 billion                Top 1.1%                                            80%

$3 billion to $5 billion                  Top 1.7%                                            60%     

$2 billion to $3 billion                  Top 2.6%                                            40%

All others                                         100%                                            20%

Any fair observer would have to conclude that this represents a rational and efficient matching of benefits and costs.

Moreover, we propose that the most affluent colleges that participate in federal student loans, such as Harvard, Yale and Stanford, should contribute to a “Trust to Offset Losses from Federal Student Loans” through an excise tax on their endowments — some of which are larger than the GDP of sovereign countries. 

This tax would apply to only about the top 1 percent or 2 percent of college endowments. The trust would then be used to offset some of the remaining losses the less affluent colleges cannot pay, thus sharing the wealth of the top 1 percent or 2 percent to help others in need.

For the excise tax to fund the Trust to Offset Losses, we propose:

Endowment Size           Cumulative Rank In Endowments          Tax Rate                     

Over $5 billion                             Top 1.1%                               1% per annum

$2.5 to $5 billion                          Top 2%                                   0.5% per annum

It seems only fair that the wealthiest colleges be asked to contribute to cover the student loan losses the Biden administration is sticking taxpayers with. After all, they benefited the most from the Great Tuition Bubble since the 1980s, just as subprime mortgage brokers benefited in the Great Housing Bubble in the early 2000s.

Since Biden’s St Nicholas Day gift to student borrowers simultaneously gave a large lump of coal to the taxpaying public, not to mention to those borrowers who made every sacrifice to meet their loan obligations, it’s high time to give the rest of us a Christmas present of a new model for government student loans. The proper model should be one that will keep on giving as colleges and universities take on the responsibility and accountability they have shirked until now.

Don’t Let Colleges Off the Hook for Loan Debt

Published in The Wall Street Journal:

Mitch Daniels makes many insightful points in his indictment of the utterly failed and, as he says, “bankrupt” system of federal student loans (“Student Loans and the National Debt,” op-ed, Sept. 2). Among the most important is that the colleges “encouraged students to borrow.” The colleges played the same role in this credit disaster as subprime-mortgage brokers did in the housing bubble: inducing excessive debt while sticking somebody else with all the risk.

Alex J. Pollock

Biden's approval is down. Student debt forgiveness won't help.

Published in The Week.

There's a strong case for helping these Americans, who bear the costs of higher education but enjoy none of the benefits — and for making universities risk their own money on the financial trajectory of their students. But concentrating benefits on an already successful group is a slap in the face to precisely the non-professional, older, and more rural voters whom Democrats need to court.

Read the full piece here.

The New Campus Housing Bubble

Published in Forbes, The Independent Institute, Ohio University College of Arts & Sciences Forum, and Catalyst.

My good friend, banker-scholar Alex Pollock of the R Street Institute, has shared with me some startling new data. High priced, comparatively luxury college student housing has been popular, and in this century lots of apartment complexes have been built with many amenities —granite or marble counter-tops, fancy swimming pools or saunas, etc. With unemployment rates below four percent and  low overall real estate delinquency since recovering from the traumas of a decade or more ago, this sector should be booming. But according to a story published by Wolf Street (Wolf Richter), delinquencies are rising dramatically.

PRO: Taxpayers shouldn’t get stuck with a $1.5 trillion loan default tab

From Richmond Times-Dispatch, Austin American-Statesman, Chicago Tribune, and The Guam Daily Post.

As the noted financial scholar Alex J. Pollock, former president and CEO of the Federal Home Loan Bank of Chicago, suggests: Make the schools pay 20% of the debt obligations of former students facing loan delinquency or default.

Colleges need to have skin in the game to tackle student loan debt

Published in The Hill.

Republican Senator Lamar Alexander of Tennessee rightly wants to make colleges more accountable for the results of student loans. With these federal loans, the government lends with no credit underwriting, the students get in debt, but who gets all the money? The colleges. If the students fail to repay the loans, who takes the hit? The taxpayers. This is a perverse incentive structure. It leads to, as his committee report found, “nearly half of all borrowers not making payments on their student loans.”

Alexander proposes a “new accountability system for colleges based upon whether borrowers are actually repaying their student loans.” Great idea! In a similar vein, the annual White House budget correctly observes a “better system would require postsecondary institutions that accept taxpayer funds to share in the financial responsibility associated with student loans.” Indeed, each college should share the risk of whether its students repay the money they borrowed and the college spent. Nothing improves your behavior like having to share in the risk you are creating. In his book “Skin in the Game,” Nassim Nicholas Taleb wrote, “If you inflict risk on others, and they are harmed, you need to pay some price for it.”

In student loans, with their abysmal repayment rate, colleges play the same role as subprime mortgage brokers did in the infamous housing finance bubble. They promote the loans without regard to how they might be repaid, they make money from the loans, and they pass all the risk on to somebody else. In the housing finance case, the risk went ultimately to the taxpayers. In the student loan case, it goes directly to the taxpayers. Just as the flow of easy mortgage credit induces higher house prices then takes even more debt to pay the higher price, the flow of easy student credit induces higher college prices then takes even more debt to pay the higher tuition. It is a sweet deal for colleges that create the risk, keep all the money, and stick the taxpayers with all the losses.

A Brookings Institution research paper points out that with low repayment rates, the federal student loan program represents a “sizeable taxpayer funded transfer” to the colleges. It rightly asks how much of the taxpayer losses the college should have to pay back. It proposes that each cohort of college borrowers be measured at the end of five years of required payments, and each college has to pay at least 25 percent of the amount by which the actual principal reduction has fallen short of 20 percent of the total of the original loans after five years. The 20 percent principal reduction results from what would happen with a 15 year amortization of the loan pool as the standard used. That seems perfectly reasonable.

This proposal is a good stab at it, but I would say do not wait for five years to address the problem. Do it every year. Take the total loan pool of each borrower cohort of the college. Establish a 15 year amortization schedule for the principal of the pool. Measure every year how much principal has actually been paid in the pool as a whole. Each year the college should pay to the Treasury, I suggest 20 percent of any repayment shortfall against the standard. That would be a steady financial feedback loop.

After 15 years, the college will have reimbursed taxpayers for 20 percent of whatever loan principal was not paid. Of course, taxpayers would still be paying for 80 percent of the losses. The 20 percent loss participation would be enough to give the college the right incentives to improve its repayment performance and control instead of constantly bloating the debt of its students. Student loan borrowers, like mortgage borrowers, are hurt being saddled with thousands of dollars in debt they cannot pay.

Colleges should have maximum flexibility for how to work on this. They could increase efficiency, reduce their costs and their prices, or shorten the time to graduation to scale back the need for borrowing. They should make sure the students understand what loans mean and how they are expected to repay, consider their ability to pay, guide the students to programs with the most promising job prospects for them, and adjust their mix of programs. They can do all of the above plus other ideas and managing the tradeoffs involved. Colleges should no longer play the role of subprime mortgage brokers. They need some skin in the game now.

Skin in the student loan game

Published in Barron’s.

Sheila Bair (“Sheila Bair Sees the Seeds of Another Financial Crisis,” Interview, March 3) is so right about colleges having no skin in the troubled student loan game, which creates a fundamental misalignment of incentives. Colleges play a role like mortgage brokers did in the housing bubble: promoting the loans, getting the borrower to run up debt, and immediately benefiting financially from the loan but having zero economic interest in whether the loan defaults or not. Therefore, it has been too easy for colleges to inflate their costs into a bubble that floats on the government-sponsored debt, just as the bubble in house prices did. The solution is straightforward: Colleges should be fully on the hook for the first 20% of the student loan losses from each cohort of their students. This would make colleges care about their students’ future financial success, care about their defaults and losses, better control their costs, and in general create better outcomes for all concerned.

Colleges are acting like subprime loan brokers

Published in the Financial Times.

Rana Foroohar, in “Dangers of the college debt bubble,” points out a lot of problems with the U.S. student loan program, but misses the main point: the corruption of colleges by the flow of government money.

For a great many students, colleges play a role similar to that of a subprime mortgage broker: promoting risky loans with a high propensity to default. The college takes all the cash up front and spends it (perhaps, indeed, on “hiring more administrators” and “building expensive facilities”) and just like the subprime broker, it passes all the credit risk on to some sucker — in this case, the taxpayer.

An essential step to address this government-designed bubble is to make all colleges responsible for a significant part of the risk they promote and create. This is the lesson we thought we learnt from the housing bubble: give the pushers of credit some skin in the game. This might logically be done by making the colleges pay the first 20 percent of the loan losses of each student cohort.

I have come across one private college that has credit-enhanced the loans to its students under a fully private program for years, with excellent experience in terms of incentive alignment and financial results.

Do most colleges want to be responsible for their own risk-creating actions? Of course not. Should they be? Of course.