Popping The Tuition Bubble

One of the problems with college student loans is that students assume nearly all of the risk of default. Colleges have no risk -- they get paid up-front -- while lenders participating in the federal student loan program (which controls a large, albeit shrinking, majority of all loan volume) get bailed out by the taxpayers if students don't repay. That means the taxpayer assumes some risk, of course, but the costs are so non-transparent and buried within the federal budget that they don't really influence behavior in any way. As college becomes more and more expensive and students borrow more and more money, this problem is getting worse. As Erin Dillon showed last year, 10-year default rates for students who borrow over $15,000 are nearly 20 percent.

The solution? Allow students to sell a percentage of their future earnings to investors, thus shifting the risk from financially vulnerable and unsophisticated young individuals to financially sophisticated markets that can manage risk appropriately. This would also have the side benefit of creating new market incentives for the colleges themselves to do a better job of helping student graduate and prosper in their careers. This the subject of this new piece from yrs truly and Rick Hess, director of education policy studies at AEI, called "Popping the Tuition Bubble."