Policymakers have put forth “risk sharing” proposals designed to give colleges “skin in the game” for the loan defaults of their students, rather than leave taxpayers to foot the entire bill. These proposals typically focus on student loan outcomes, such as the three-year cohort default rate or the student loan repayment rate. But building incentives around these long-term metrics may not induce the changes in institutional behavior that policymakers expect. We propose a new approach that relies on a short-term metric of semester completion and a set of changes to the federal financial aid program aimed at reducing the overall risk within the student-borrower pool.
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