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The Student Protection and Success Act Seeks to Strengthen Institutional Accountability in Higher Ed

In an effort to address burdensome student debt levels and poor postsecondary outcomes, Senators Jeanne Shaheen (D-NH) and Todd Young (R-IN) recently reintroduced the Student Protection and Success Act (SPSA), legislation that seeks to improve student success and borrower outcomes through a combination of institutional incentives and penalties.

Below, we summarize the legislation and analyze its effect on schools.

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Revoking Federal Financial Aid Access Among the Worst-Performers

Currently, institutions lose eligibility to accept federal financial aid dollars (i.e., federal loans and grants) if their student borrowers exhibit consistently high default rates. While this makes sense in theory, default rates represent an incomplete measure of student success, as they fail to consider the many options struggling borrowers have to avoid default, such as entering financial hardship forbearance or enrolling in an income-driven repayment plan.

The SPSA seeks to address this issue by tying federal aid eligibility to a three-year repayment rate rather than the default rate. Under the bill, if the vast majority of borrowers (i.e., 85 percent or more of an incoming class) are unable to reduce their principal loan balance within three years of entering repayment, that institution will no longer be eligible to accept federal financial aid. This provision is designed to protect students from enrolling in institutions that produce consistently poor outcomes, as well as to protect taxpayer resources from being used at these institutions.

The Stick: Institutional Risk-Sharing    

The SPSA seeks to incentivize continuous improvement among every institution that is eligible for federal financial aid. Specifically, the system levies penalties based on an institution’s borrowers’ aggregate loan repayment level, positing that if institutions have additional “skin-in-the-game” regarding borrower outcomes, they will invest more resources in equipping students with the skills necessary to thrive in the labor market.

The bill would assess penalties equal to 2 percent of an institution’s “cohort non-repayment balance,” which is the portion of a given incoming class’s total outstanding loan balance that has not seen a principal reduction within three years of entering repayment. This penalty would be capped at 2.5 percent of a given institution’s total revenue, to help ensure that the payment is not unduly punitive for any institution.

The Carrot: College Opportunity Bonus Program

One potential challenge with any type of risk-sharing proposal is that it may disincentivize schools from enrolling students from vulnerable populations (such as low-income students and students of color), who face extra barriers to repayment. The SPSA seeks to mitigate this possibility by rewarding institutions that promote opportunity for low-income students and invest in student success.

Specifically, the legislation would create a bonus fund, limited to institutions with a three-year repayment rate greater than 25 percent. It would be revenue-neutral, financed by the risk-sharing system, and distributed based on three variables, weighted equally:

  • The number and percentage of Pell students enrolled;
  • The three-year repayment among Pell borrowers;
  • The percentage of an institution’s resources spent on student services (e.g., instruction, career counseling, etc.) as a percent of resources that could reasonably be allocated towards student services (more on this below).

All bonuses would also be capped at 2.5 percent of a given institution’s total revenue.

Importantly, the bill would also hold all schools harmless until Fiscal Year 2022. For each year before, the Department of Education would notify all institutions of the consequences that they would face if the system were operationalized. This notification period would provide schools with the opportunity to more smoothly transition towards the new system.

As a whole, the goal of this accountability system is to realign incentives. By redirecting all of the penalty revenue back into the bonus program, the proposal would apply relatively modest penalties and bonuses to institutions. On the margin, however, the system could change school behavior by rewarding improvements in student outcomes.

Changes to Student Services Reporting

This bill would also make several important reforms to how institutions report their finances. Currently, some schools report recruitment, marketing and intercollegiate athletics spending as part of “student services,” a category that should capture spending designed to improve student outcomes.

The SPSA would reform the student services category to only include spending that directly serves student development and well-being, such as instruction, academic advising and career counseling. In addition, schools would have to separately report recruitment and marketing spending. This would provide policymakers with a more accurate assessment of student services spending, which would be used to inform how the bonus funds are allocated in the system.

Additionally, the SPSA would create a new “student service resources” measure, designed to capture revenues that a school could reasonably be expected to allocate towards student services. This would include:

  • Net tuition revenue;
  • State and local appropriations;
  • Endowment income;
  • Excess revenues related to student housing and food services;
  • A subtraction of spending related to facility operations and maintenance.

This sum would serve as the denominator of the equation used to calculate the percent of resources an institution allocates towards student services, which informs the bonus allocation. The above parameters are an attempt to account for differences among institution types that could affect the amount a school can allocate towards student services. For example, residential campuses have higher overhead costs than online schools, which is why operations and maintenance are subtracted from the denominator, and why only excess revenues related to housing and food services are included.

Conclusion

Given rising debt levels and lackluster postsecondary student outcomes, significant reforms are needed to improve the higher education system for students and families. While additional considerations—such as capacity-building at institutions that enroll high proportions of traditionally under-served populations—are likely needed to promote equity, the Student Protection and Success Act represents a rare bipartisan approach to the goal of strengthening institutional accountability. Progress towards this goal would be a positive step in improving higher education for students and families.

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