Publications / Policy Memo

Innovating Out of Student Debt

By / 5.21.2018

A “College Finance Innovation Fund” could accelerate ideas to lower debt and make schools more accountable for their graduates’ success

For many students, the burden of student debt lingers years after leaving college, dragging down their finances and household security. New federal data find that, 12 years after enrollment, students with debt still owed, on average, two-thirds of what they had borrowed – and as many as 27 percent had defaulted.

Colleges, however, face no equivalent long-term financial stake in their students’ education: their obligations are done once the tuition is paid and the last exam is graded. Except perhaps for the pressure to put on a good show for U.S. News & World Report’s college rankings, schools have little incentive to ensure their students can land good jobs with decent pay – let alone graduate. Students bear the full risk of their investment and cope with the fallout if things don’t pan out as planned.

This lopsided burden of risk is one reason a dramatic expansion in financial aid – i.e., “free college” – can’t solve the crisis in college affordability. Schools would see no need to rein in their costs or to share the risks of investing in education with their students. In fact, the opposite. If the government is willing to pick up more of the tab for students, there’s no reason that tab wouldn’t simply grow – with potentially no reduction in student debt.

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