The Corner


Why Keep Colleges from Being Responsible Lenders?

Putting the federal government into the business of financing higher education was a great blunder, with adverse consequences daily. Among those consequences is the fact that some 8 million Americans are now in default on loans that probably would never have been made by real lending institutions with their own money at risk.

In an effort at looking “responsible” several years ago, our wonderful politicians decided to punish colleges that have too many students defaulting. That had a big impact on some lower-end colleges where a high percentage of the students are of doubtful academic drive and ability. In order to protect their eligibility for federal Pell Grants, they decided to stop allowing students to attend if they are also taking out federal loans. In North Carolina, a majority of the state’s community colleges have decided to do that.

But why make them either drop out or accept the federal loan programs entirely? Wouldn’t it make sense to allow school officials to decide whether or not to allow a student to take out federal loans based on their assessment of each student’s likely prospects for success — that is, graduating, finding employment, and paying off the debt? You might think so, but that isn’t allowed.

In today’s Martin Center article, Shannon Watkins writes about all of this.

“Leaving federal loan programs,” she writes, “is the only option many colleges have to protect their Pell Grant eligibility. That’s because another option — minimizing default risk on the front end of the financial aid process — is not open to them.”

The Education Department ran a pilot program for several years that did allow schools to discriminate on the basis of a student’s likelihood of defaulting, but that program has been terminated and the department apparently won’t continue it. Leftists are cheering that decision, such as the New America Foundation, which frets that many low-income students will be excluded from loan eligibility if colleges say, “No federal loans if you want to enroll here.” To the Left, excluding any student is bad, but most of those students who might be excluded have other options for the post-high-school training they need.

Watkins’s conclusion makes good sense: “Penalizing schools for high student loan default rates is sensible, but only if they are given flexibility to try to stop the problem before it arises.”

George Leef is the director of research for the John William Pope Center for Higher Education Policy.

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