Tertiary education is a costly thing. How to design its financing is a major topic in public policy. Around the world, very different policies have been implemented – from tuition-free education in Germany, and interest-free loans reimbursed after graduation in Australia, to a more or less free-market solution in the U.S.
All-time high tuition fees in the U.S. and the accompanying peak in the national student loan debt of more than $1.3 trillion, with more than 80% backed by the federal government, have sparked a new discussion on how to design tertiary education financing. Default risk of students is high, exceeding that of credit cards, mortgages or auto loans. Current drastic examples like the collapse of for-profit tertiary education provider Corinthian Colleges show that the blame is partially attached to the institutions themselves. An emerging discussion addresses whether colleges should share their part of the burden of risk of students defaulting.
IZA Fellow Douglas A. Webber (Temple University) is an expert on tertiary education financing and testified in front of a U.S. Senate committee on May 20. We took the opportunity to talk to him about his opinion in the debate.
Should tertiary education institutions share their part of the default risk of student loan debt?
Webber: I am strongly in favor of this type of intervention. Student loan debt is a problem both on a macroeconomic ($1.3 trillion and growing, and has been compared to the housing bubble of the last decade) and individual level (growing debt negatively affects numerous important measures of well-being in addition to financial security). It is also important to recognize that there does not need to be fraudulent intent or poor teaching (although these are certainly issues at some institutions) for colleges to bear some fraction of the responsibility for their students’ labor market outcomes.
Risk-sharing means setting incentives to increase student completion rates. What can colleges do to keep student drop-out at low levels?
Webber: There are actually many mechanisms that schools would be incentivized to use, student completion rates are just one of the most obvious channels. Time to degree completion is important because it impacts both the level of debt and the likelihood of graduation. Getting students through their tertiary education in a more efficient way would substantially reduce the number of eventual student defaults. Furthermore, many students aren’t aware of the enormous implications that their choice of major has on their future job-finding prospects. Schools and specific degree programs need to be more transparent with the labor market outcomes of their past students. I am certainly not saying that students should choose a school or major solely based on economic factors, but if graduates from an institution/major are unable to consistently find gainful employment, prospective students and parents need to be aware of this before taking on substantial debt.
How would students be affected by such a policy change?
Webber: This was the focus of a recent IZA Discussion Paper of mine. I wanted to examine the extent to which institutions might respond to risk-sharing by passing the costs on to students in the form of higher tuition. Without getting into the technical details, I found that for the vast majority of institutions, the expected tuition increases would likely be modest (1-2%, even under fairly stringent risk-sharing penalties). The only institutions which are projected to see considerably higher tuition increases (2.5-4.5%) are those with high tuition, high rates of borrowing, and high default rates – in other words, the institutions who are most contributing to the national student debt problem.
Read more about the economics of higher education in these recent IZA World of Labor articles:
- Is the return to education the same for everybody? (by Douglas Webber)
- Do higher levels of education and skills in an area benefit wider society? (by John V. Winters)
- Overeducation, skill mismatches, and labor market outcomes for college graduates (by Peter J. Sloane)
- University study abroad and graduates’ employability (by Giorgio Di Pietro)
- How to attract foreign students (by Arnaud Chevalier)