The standards for getting a federal college loan are low, and too many people have gotten themselves in trouble with their student debt. I spoke with Preston Cooper, senior fellow at the Foundation for Research on Equal Opportunity, about federal loans and college costs for the Overton Window podcast. We also spoke about his plan to change federal loan rules to encourage lower costs and better value in college programs, and to keep people from defaulting on their student loans.

“The federal government will give students loans, no questions asked,” Cooper says. Anyone with a high school degree and without a criminal record is eligible. Undergrads can borrow up to $31,000, the undergraduate’s parents can borrow an unlimited amount, and graduate students can borrow an unlimited amount.

“When colleges are able to get their students unlimited loans backed by taxpayers, backed by the federal government, the natural thing for a college to do is to increase prices,” Cooper says. “Colleges are not competing on price anymore. They’re competing on prestige, on amenities, they’re competing on all these other dimensions because the federal government has stepped in and broken the market.”

The amount of student debt has skyrocketed. It has increased from $240 billion in 2003 to $1.6 trillion in 2023, more than quadrupling when adjusted for inflation.

“Sometimes the federal government gives loans to finance educational programs that don’t justify their cost. Sometimes students end up with debt that they can’t repay,” Cooper says.

It’s bad for both borrowers and taxpayers when people aren’t able to pay back their student loans, with 11 million borrowers in default. The borrowers have their credit ruined and their wages garnished. Taxpayers face a needless expense.

The standard rationale for student loans is that they allow some students who otherwise couldn’t afford to go to college to do so. Loans are supposed to finance a degree that will cause students to earn more than would otherwise be the case, and students can pay back the loans with interest. Cooper has calculated the expected values for thousands of degree programs. With many degree programs, he found, the average graduate does not earn a sufficient wage premium to make the debt worthwhile. “Student loans go bad when they are used to finance education that does not pay off,” Cooper says.

Cooper has a solution: Instead of having the federal taxpayer step in to pay off loans when borrowers are unable to pay, make the university or college responsible. “We’re going to say to the colleges, ‘You provided this education. You charged way too much and your program doesn’t deliver enough. So we’re going to have you reimburse us for the cost that the student has not been able to pay back,’” Cooper says.

Many students wouldn’t see a change. “Some people took on student debt, got a degree that paid off, and they were able to pay back the federal government. They don’t need a handout from the federal government,” Cooper says, “But you also have this group of people who took on loans, who either didn’t get a degree, or they got a degree that’s just not worth very much in the labor market.”

Putting the risk of repayment upon universities ensures that they bear some financial risks for their students’ outcomes. Schools would have an extra incentive to keep costs down and help their students get good paying jobs.

Cooper estimates that under his plan, the federal government would collect $13.5 billion annually. He would take half of that to reduce the costs taxpayers shoulder. The other half would go to financial aid for low income students who enter one of the programs he considers high-value. “If we think that (expected) earnings are high and the price is reasonable, we’ll give lower and middle-income students a bit of an extra Pell Grant in order to pursue that program,” Cooper says.

He thinks lawmakers will find his recommendation acceptable. “I think there is a lot of bipartisan interest in holding colleges accountable for bad outcomes,” Cooper says. His is not the only risk-sharing proposal.

Both political parties could appreciate his plan, Cooper says. Republicans would like to encourage students to get a better return on their investment. Democrats would like how his plan keeps student costs down and students away from default.

He acknowledges that there is some reluctance to challenge colleges. “Lots of people have gone up against the higher education lobby and lost. They are a very powerful special interest group. Every member of Congress has a college or institution of higher education in their district,” Cooper says.

He thinks the part of his proposal that gives some students extra grants might win support from some schools. Colleges that offer inexpensive degrees that lead to good paying jobs would come out ahead.

The competitive environment for higher education also shifted. Starting around 2010, fewer people have enrolled in college. “People are voting with their feet on higher education. We have seen college enrollments declining for the last ten years or so,” Cooper says.

“What students want more from higher education is the guarantee that this is going to lead to a good job at an affordable price and too many colleges are simply not delivering on that basic standard,” Cooper says.

Check out our conversation at the Overton Window podcast.

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