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Bipartisan Legislation Aims to Strengthen Accountability in Higher Education

By Kenneth Megan, Shai Akabas

Monday, December 18, 2017

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Last week, Senators Jeanne Shaheen (D-NH) and Orrin Hatch (R-UT) introduced a bipartisan bill aimed at strengthening institutional accountability in the higher education system. The legislation, the “Student Protection and Success Act,” would replace an antiquated accountability structure and strive to give colleges and universities some “skin-in-the-game” when it comes to the outcomes of their student borrowers. As Congress gears up for reauthorization of the Higher Education Act (HEA), increasing accountability in the system should be a priority, and this bill is a great starting point for those discussions.

Here are some of the proposal’s key points:

1) Tie Federal Aid Eligibility to a Repayment Rate

Currently, federal aid eligibility is tied to default rates. If a high percentage of an institution’s borrowers default on their federal loans, the government can disallow that school from receiving federal loans and grants in the future. This metric is a poor proxy for student outcomes due to the options borrowers have to avoid default—namely by enrolling in an income-driven repayment (IDR) plan, which ties borrowers’ monthly loan payments to their income level. These plans guarantee affordable monthly payments, but  unfortunately, interest continues to accumulate. As a result, many borrowers’ monthly payments are insufficient to pay down their loans. Currently, less than half of new borrowers manage to put a dent in their principal balance within three years of their loans entering repayment. So, while defaults may be relatively low at a particular school, borrowers may still be struggling, with little incentive for the institution to act.

The Student Protection and Success Act would strengthen institutional accountability by tying a school’s loan eligibility to repayment rates rather than default levels. The bill would accomplish this by creating a new “repayment” metric—specifically, the percentage of an institution’s borrowers that make at least a one-dollar principal reduction on their loan balance within three years of entering repayment. (This would be measured on a cohort – i.e., class by class – basis.) If less than 15 percent of borrowers in a cohort reduce their principal balance within three years of their loans entering repayment, that institution would lose eligibility for federal loans and grants.

2) Implement a Risk-Sharing System

The Shaheen-Hatch legislation would also establish a risk-sharing system, under which institutions would pay a fee based on a percentage of a cohort’s non-repayment balance, which is defined as the portion of a cohort’s total outstanding loan balance whose principal has not declined by at least one dollar over the course of three years. This fee would be equal to 5 percent of the non-repayment balance.

3) College Opportunity Bonus Program

Finally, this bill would create a College Opportunity Bonus Program designed to increase higher education enrollment and success among low-income students.

Risk-sharing systems—because of their focus on student outcomes—can unintentionally create perverse incentives for institutions to enroll more students with characteristics that are correlated with success (e.g., from high-income families) and eschew students from traditionally under-served backgrounds who might be less likely to repay their loans. The bonus program included in the proposal would combat this tendency by rewarding institutions based on the number and percentage students who are eligible for Pell grants, as well as the repayment rates among these borrowers. The bonus would be funded with the revenues raised from the risk-sharing provision, and could ultimately provide institutions with an incentive to further prioritize serving low-income students, even in the context of increased accountability and risk-sharing.

Conclusion

With HEA reauthorization on the horizon, policymakers on both sides of the aisle are interested in ways to improve institutional accountability in the higher education system. The Student Protection and Success Act proposes one sophisticated way of accomplishing this, and deserves serious consideration among policymakers who are seeking to improve the higher education system for students and their families.

Stay tuned for more detailed analyses on the Student Protection and Success Act in the coming weeks.

KEYWORDS: HIGHER EDUCATION ACT, HIGHER EDUCATION, STUDENT PROTECTION AND SUCCESS ACT