The House reconciliation bill outlines a new risk-sharing formula that would have colleges pay back a portion of their students’ unpaid student loan bills. The share of unpaid debt varies primarily based on program graduates’ earnings, relative to tuition paid, and on the program or institution graduation rate.

The proposed accountability formula generates variable, nonlinear incentives for institutions and programs, principally on factors partially within their control: who graduates, what those graduates pay in tuition and fees, and whether they earn a sufficient wage after graduation. These incentives, which shift substantially based on the values of other formula components (especially on levels of borrowing and repayment under a new student loan repayment system) would likely create uncertainty and risk for institutions and programs considering whether to continue to offer student loans.

Why This Matters

Policymakers have argued that this risk-sharing accountability formula will generate incentives for institutions and programs to improve student outcomes. I find that changes to some components of the formula will matter substantially for some institutions and not at all for others. Moreover, institutions are likely vulnerable to changes outside their control, particularly the way policymakers choose to service student loans or set repayment terms. Policymakers weighing the passage of this accountability framework should ensure that the incentives of the risk-sharing formula align with their vision of how the federal government should support students and institutions in facilitating access to higher education and opportunities for improved postsecondary outcomes.

Key Takeaways

Analyzing this risk-sharing formula using typical values for different levels of programs, I find the following:

• Because the implementation of the formula would be concurrent with other changes to student lending, potential payments under this risk-sharing plan are difficult for institutions and programs to predict. Uncertainty is highest for programs with graduates who earn incomes near the threshold that could trigger a reimbursement for the completer nonrepayment cohort.
• The amount institutions owe is chiefly dependent on the amount that was unpaid by borrowers each year (through missed payments or to account for federal subsidies), which in turn is reliant on contemporary loan servicing and repayment options. If these options change (e.g., if policymakers implement new loan subsidies in the future or change servicing standards), colleges could be on the hook for more money or less money.
• Institutions could be responsible for paying a portion of students’ debt for 30 years or more after students leave the institution. The share of unpaid payments for each cohort would not decrease, even if institutions improve graduation and earnings outcomes for later cohorts.
• Institutions and programs of study would face different incentives for changing student outcomes, depending on the values of the multiple variables incorporated into the formula.

Some institutions would receive funding from the reconciliation bill’s proposed Promoting Real Opportunities to Maximize Investments and Savings in Education (PROMISE) grants, which allocate dollars based on Pell volume and graduation outcomes for low-income students. I do not model the effects of these grants, but institutions that offer graduate programs are more likely to be disadvantaged by this proposal, as only undergraduates are eligible for Pell grants.

Methodology

To look at the outcomes of the proposed accountability formula, I generate four profiles of “typical” programs and institutions. The values I choose for each profile are based on values from the College Scorecard (median earnings 10 years from institution entry and graduation rate), the 2020 National Postsecondary Student Aid Study, the 2012 Beginning Postsecondary Students Longitudinal Study, and Denning and Turner’s working paper on graduate school graduation rates.