Senate Republicans Explore Alternative Ways for Students to Finance College

While the media is focused on Hillary Clinton’s and Bernie Sanders’ plans to subsidize student loan debt should they win the presidency, the real action on college costs is happening on forward-thinking universities. Chief among them is Purdue, where University President Mitch Daniels has long been working on innovative ways to reduce tuition prices and also laying the groundwork for income share agreements, which could provide an alternative to traditional student loans.

Daniels’ recently explained the idea in an op-ed in the Chicago Tribune:

The troubling facts are almost universally known: After tripling in 10 years, this debt totals more than $1.3 trillion, which is more than the debt for credit cards, auto loans and any other category except home mortgages. Default rates parallel those for the subprime housing loans of the financial crisis, and the debt numbers show no signs of decelerating, growing again this year by an estimated 8 percent. . .

Into this dismal picture a glimmer of a better idea has appeared. Income-share agreements, under which a student contracts to pay investors a fixed percentage of his or her earnings for an agreed number of years after graduation, offer a constructive addition to today’s government loan programs and perhaps the only option for students and families who have low credit ratings and extra financial need.

Benefits of the plan accrue to students specifically and the economy generally. From a student’s point of view, income share agreements ensure that graduates never pay more than an agreed-upon portion of their income. The lender bears the risk of the student being unemployed or underemployed and in return receives some of the award if a student receives a lucrative job offer. This also has the benefit of sending a valuable market signal to college students trying to determine which degree field to enter. Presumably, lenders will offer much better terms (lower rates, reduced repayment periods) to in-demand degrees from high performing colleges, while majors with few job prospects will naturally come with higher rates, a reflection of the higher risk.

Fortunately, Congress is taking an interest. Last week the Joint Economic Committee held a hearing to explore the current challenges of financing college education and some potential alternatives to the current student loan regime. The star speaker was Daniels, who lamented the current decisionmaking at many colleges.

“Economists and policymakers have long feared that the easy flow of loan dollars combined with pressures placed on college administrators to growth their budgets have made schools slow to rein in costs,” Daniels testified. “Budget solutions usually follow the path of least resistance and when your customers have unlimited funds and insufficient information about the product they are buying, the easiest budget solution is often to raise prices rather than find operational efficiencies.”

At Purdue Daniels has done things differently. For instance, he made substantial cuts to administration, which has allowed him to freeze tuition for four years. He made textbooks more affordable and reduced housing costs. Those changes alone helped to bring down student debt levels by $50 million.

But Democrats on the Joint Economic Committee were unimpressed, especially with Daniels’ idea for alternative financing arrangements like Income Share Agreements.

“Yes, student debt is a big problem,” ranking Democrat Carolyn Maloney said. “And how do our Republican colleagues suggest that we respond to this problem? By restricting the availability of federal student loans and by expanding the private student loan market.”

“Rather than look to the private sector to magically solve the student debt problem, we should strengthen public support for higher education,” she continued.

Maloney’s comments show just how little thought Democrats are putting into actual solutions, content instead to simply throw more taxpayer money at a problem and call it fixed. After all, Republicans have no plans to restrict the availability of federal loans. In fact, just last year Republicans passed a permanent fix to the problem of spiking loan rates by setting interest rates at a level equal to the 10-year Treasury note.

And Republicans also have no designs on expanding the private student loan market. The idea Daniels’ was proposing has nothing to do with loans. Instead, it’s an equity investment where investors buy shares in an individual’s earning prospects. There is no principal balance or interest, as you’d have with loans, and thus there is no such thing as a default, only a balance of risk between investor and student.

“This is true ‘debt-free’ college,” Daniels concludes.

Apparently that’s a future that Democrats fear.