BloombergBusinessweek: Should Colleges Be On the Hook When Students Can't Repay Their Loans?

December 27, 2013

By Karen Weise

One out of every seven borrowers with student loan debt falls behind on payments within three years. The question is: Who should pay for those missed payments? Under a new proposal from three Senate Democrats, the schools should be on the hook.

Before Christmas, senators Elizabeth Warren (D-Mass.), Jack Reed (D-R.I.), and Dick Durbin (D-Ill.) released a slate of proposed reforms aimed at lowering student debt. In addition to a student borrower’s bill of rights that would put more emphasis on getting services to offer students affordable repayment plans, the senators want schools with lots of struggling borrowers to compensate the government for loan repayment losses.

The penalty proposed in the Protect Student Borrowers Act of 2013 would affect schools at which at least a quarter of students take out loans, a threshold that would include most institutions. Inside Higher Ed reports that community colleges would be exempt, along with historically black institutions.

Story: Unpacking the Proposed Student Loan Borrower Bill of Rights

The proposal would force schools to pay a penalty, along a sliding scale, based on how frequently students default on their loans. The Chronicle of Higher Education writes: “Colleges and universities with student-loan default rates of more than 30 percent would pay a fine to the Department of Education equal to 20 percent of the total value of loans issued to their students in default. … the least-severe infraction—default rates from 15 percent to 20 percent—would require a 5 percent penalty.”

Those thresholds are likely to most affect for-profit colleges, which have the country’s highest default rates (PDF). For-profit colleges already face a proposal from the U.S. Department of Education that would force schools to pay back some of the debt if their students don’t earn enough to cover the loans.

But for-profit colleges aren’t the only ones facing scrutiny over student borrowing. Debt will likely be a factor in the new federal ratings for colleges, which eventually could tie into how much federal student aid a college receives. Whether the Senate bill goes anywhere—a challenge, to say the least—it’s safe to bet that pressure will mount on colleges to address student loan debt as their problem, and not merely as an issue for their students.

Story: Borrowers Are Finally Using the Government's Helpful Student Loan Program

Weise is a reporter for Bloomberg Businessweek in New York. Follow her on Twitter @kyweise.

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