Colleges are acting like subprime loan brokers
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.
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