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Risk-Sharing Proposals Would Have Negative Consequences for Students and Institutions

April 29, 2015

US Capitol


​ACE and 25 higher education associations told Sen. Lamar Alexander (R-TN) yesterday that proposals to add risk and cost for colleges and universities participating in federal financial aid programs would “penalize all students and institutions in attempt to address the behaviors of a handful of bad actors.”

The groups’ comments were sent in response to one of three white papers Alexander released March 23 exploring ideas that could find their way into an eventual Higher Education Act (HEA) reauthorization bill.

The current HEA expires at the end of this year, and the senator, in his capacity as chair of the Committee on Health, Education, Labor and Pensions, has vowed to complete work on the measure this year.

This particular paper includes a range of proposals to "realign and improve federal incentives so that colleges and universities have a stronger vested interest and more responsibility in reducing excessive student borrowing and prioritizing higher levels of student success and completion."

Three general categories emerge from these proposals:

Participation Fees: Under this concept, the federal government would mandate that institutions pay a fee to participate in the federal aid programs. This may take the form of a per-borrower fee or as a percentage of aid awarded, but would represent an annual payment to the federal government.

Default Penalties: This concept envisions institutions repaying some percentage (with the ranges mentioned varying from 10 percent to 100 percent) of the dollar amount of their former students’ defaulted loans.

Institutional Loan Guarantees: Unlike the other two concepts, this concept envisions institutions being responsible for some (or all) of the capital and interest on the loans borrowed by their students. 

The theory behind risk-sharing proposals as a solution to over-borrowing is that institutions will reduce borrowing amounts for their students out of fear of penalties and fees if they default. However, the groups point out, institutions have significant limitations on their ability to curb over-borrowing, as the right to borrow federal dollars is an entitlement.

Regarding student outcomes, financial aid programs were created to ensure that all students, regardless of their economic circumstances, have equal access to higher education. This system, the groups write, is predicated on the idea that that providing opportunity is a more valuable policy goal than limiting risk. The adoption of these risk-sharing proposals would do much to reverse those longstanding principles.

ACE and the higher education community also will be submitting comments on the other two white papers, which deal with accreditation and how the federal government collects data from colleges. 

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