[Senate Hearing 114-624]
[From the U.S. Government Publishing Office]
S. Hrg. 114-624
REAUTHORIZING THE HIGHER EDUCATION ACT: EXPLORING INSTITUTIONAL RISK-
SHARING
=======================================================================
HEARING
OF THE
COMMITTEE ON HEALTH, EDUCATION,
LABOR, AND PENSIONS
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING REAUTHORIZING THE HIGHER EDUCATION ACT, FOCUSING ON EXPLORING
INSTITUTIONAL RISK-SHARING
__________
MAY 20, 2015
__________
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COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS
LAMAR ALEXANDER, Tennessee, Chairman
MICHAEL B. ENZI, Wyoming PATTY MURRAY, Washington
RICHARD BURR, North Carolina BARBARA A. MIKULSKI, Maryland
JOHNNY ISAKSON, Georgia BERNARD SANDERS (I), Vermont
RAND PAUL, Kentucky ROBERT P. CASEY, JR., Pennsylvania
SUSAN COLLINS, Maine AL FRANKEN, Minnesota
LISA MURKOWSKI, Alaska MICHAEL F. BENNET, Colorado
MARK KIRK, Illinois SHELDON WHITEHOUSE, Rhode Island
TIM SCOTT, South Carolina TAMMY BALDWIN, Wisconsin
ORRIN G. HATCH, Utah CHRISTOPHER S. MURPHY, Connecticut
PAT ROBERTS, Kansas ELIZABETH WARREN, Massachusetts
BILL CASSIDY, M.D., Louisiana
David P. Cleary, Republican Staff Director
Evan Schatz, Minority Staff Director
John Righter, Minority Deputy Staff Director
(ii)
C O N T E N T S
__________
STATEMENTS
WEDNESDAY, MAY 20, 2015
Page
Committee Members
Alexander, Hon. Lamar, Chairman, Committee on Health, Education,
Labor, and Pensions, opening statement......................... 1
Murray, Hon. Patty, a U.S. Senator from the STate of Washington.. 4
Reed, Hon. Jack, a U.S. Senator from the STate of Rhode Island... 6
Prepared statement........................................... 8
Casey, Hon. Robert P., Jr., a U.S. Senator from the State of
Pennsylvania................................................... 10
Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode
Island......................................................... 40
Warren, Hon. Elizabeth, a U.S. Senator from the State of
Massachusetts.................................................. 41
Franken, Hon. Al, a U.S. Senator from the State of Minnesota..... 43
Cassidy, Hon. Bill, a U.S. Senator from the State of Louisiana... 46
Baldwin, Hon. Tammy, a U.S. Senator from the State of Wisconsin.. 48
Murphy, Hon. Christopher, a U.S. Senator from the State of
Connecticut.................................................... 49
Bennet, Hon. Michael F., a U.S. Senator from the State of
Colorado....................................................... 51
Witnesses
Kelly, Andrew P., A.B., M.A., Ph.D., Director, Center for Higher
Education Reform, American Enterprise Institute, Washington, DC 10
Prepared statement........................................... 12
Silberman, Robert S., B.A., M.A., Executive Chairman, Strayer
Education, Inc., Herndon, VA................................... 19
Prepared statement........................................... 21
Wang, Jennifer, Policy Director, Young Invincibles, Washington,
DC............................................................. 24
Prepared statement........................................... 26
Webber, Douglas A., B.A., M.A., Ph.D., Assistant Professor,
Temple University, Philadelphia, PA............................ 30
Prepared statement........................................... 32
ADDITIONAL MATERIAL
Statements, articles, publications, letters, etc.:
Strayer Education, Inc., letter.............................. 56
Response to questions of Senator Murkowski by:
Andrew P. Kelly, A.B., M.A., Ph.D........................ 56
Robert S. Silberman, B.A., M.A........................... 58
Jennifer Wang............................................ 60
Douglas A. Webber, B/A/, M/A/, Ph.D...................... 62
(iii)
REAUTHORIZING THE HIGHER EDUCATION ACT: EXPLORING INSTITUTIONAL RISK-
SHARING
----------
WEDNESDAY, MAY 20, 2015
U.S. Senate,
Committee on Health, Education, Labor, and Pensions,
Washington, DC.
The committee met, pursuant to notice, at 10:09 a.m. in
room 430, Dirksen Senate Office Building, Hon. Lamar Alexander,
chairman of the committee, presiding.
Present: Senators Alexander, Cassidy, Murray, Casey,
Whitehouse, Warren, Franken, Baldwin, Bennet, and Murphy.
Opening Statement of Senator Alexander
The Chairman. Good morning. The Senate Committee on Health,
Education, Labor, and Pensions will please come to order.
This is our third hearing in this Congress. We had a number
in the last Congress on the reauthorization of the Higher
Education Act. This morning we're exploring the concept of
institutional risk-sharing in higher education, whether
colleges and universities should have what some might call
``skin in the game'' on student borrowing.
Senator Murray and I will each have an opening statement.
We will introduce our panel of witnesses. After our witness
testimony, Senators will each have 5 minutes of questions.
We're pleased to have Senator Reed with us. He has
indicated that his schedule permits him to wait until after
each of us have our opening statements. Then we will go to you
and to our other witnesses, and then we'll have the questions.
Despite considerable demand by some Senators, I'm going to
place you under the witness protection program and you'll not
be quizzed by Senator Whitehouse and Senator Warren.
[Laughter.]
Senator Reed. Thank you very much, Mr. Chairman. Thank you.
The Chairman. We welcome you here, and I understand you ran
a 5K already today. Is that right?
Senator Reed. Just a typical day in the life of--yes.
[Laughter.]
The Chairman. Senator Reed--I'll introduce him in a
minute--was a member of this committee, and he and others of us
worked together on this idea of ``skin in the game,'' as we
call it. It's very helpful to have him come back.
It's never easy to pay for college, but Federal taxpayers
have made it easier than many people think. About half of our
country's 22 million undergraduate college students have a
Federal grant or loan to help pay for college. Nearly 9 million
receive a Federal Pell Grant of up to $5,700, which they don't
have to pay back. For low-income students, this is enough to
make each year of community college tuition free, with some
money left over. The average community college tuition is
$3,347 per year.
It's also enough to get a head start on a 4-year degree.
The average tuition and fees at a public 4-year university,
which 38 percent of students attend, is $9,100 a year. Add up
the community colleges and the 4-year institutions that are
public, and that's about 75 percent of our students.
In addition to these Pell Grants, next year taxpayers will
lend about 8 million undergraduate students $100 billion in new
student loans at an interest rate of 4.29 percent. Students do
have to pay back these loans.
Federal loans are easy to obtain. It doesn't matter what
your credit rating is, and the terms for paying them back are
generous. You can pay your loans back like a mortgage over 10
years, or you can enter a program that allows you to pay it
back as a percentage of your income over 20 years. And if the
loan isn't paid off after 20 years, it's forgiven.
While we hear a lot about students with debt of more than
$100,000, that's only 4 percent of student loans, and more than
90 percent of those are graduate students.
The average debt for an undergraduate student with a 4-year
college degree is about the same as an average auto loan in the
United States, around $27,000. For that investment, the College
Board says you'll earn an extra $1 million over your lifetime.
Still, some students have trouble paying back their debt.
According to the Department of Education, of the more than 41
million borrowers without standing student debt, about 7
million, or 17 percent of those borrowers, are currently in
default, meaning they haven't made a payment on their loans in
at least 9 months. The total amount of loans currently in
default is $106 billion, or about 9 percent of the total
outstanding balance of Federal student loans.
While the information isn't easily available, as Senator
Warren has pointed out, over the long haul the Federal
Government collects on most of these debts one way or the
other.
It's clear that some students borrow too much, and this
hearing is about how do we discourage that. We're looking at
several ways to do it. The FAST Act, which several members of
the committee have introduced, would ensure that part-time
students aren't able to borrow as much as a full-time student.
I'm exploring recommending a change that would give colleges
the authority to counsel student loan borrowers more
frequently, or even limit the amount of money students might
borrow, and today we're talking about a third way to address
over-borrowing; that is, ensuring that colleges have some
responsibility to or vested interest in encouraging students to
borrow wisely, graduate on time, and be able to repay what
they've been loaned.
If colleges have this incentive, it may not only help
students make wiser decisions about borrowing, it could help
reduce the cost of college, thereby reducing debt. For example,
colleges might encourage students to complete their education
more quickly. Today, nearly half take longer than 6 years to
complete any degree or certificate, or never finish at all.
Completion is important. Nearly 70 percent of those who default
on their Federal student loans never finish their education.
At the University of Tennessee in Knoxville, they're now
saying to students you're going to pay for 15 hours every
semester whether you take it or not. That's three more than
Federal student aid requirements insist on. The chancellor told
me this week that most students are now taking 15 hours, and
the graduation rate is going up.
I've also encouraged colleges and universities to explore
3-year degrees. Last week I spoke at a community college in
Tennessee, Walters State, where one of the graduates was also
graduating from high school that week. By getting both degrees
and entering Purdue University next year, the second semester
of the second-year class saved him an estimated, $65,000.
Colleges might find efficiencies and savings. The former
president of George Washington University once told me this. He
said, ``You could run two complete colleges with two complete
faculties in the facilities now used half the year for one.''
That's without cutting the length of students' vacations,
increasing class sizes, or requiring faculty to teach more.
Dartmouth saves $10 to $15 million a year by requiring one
mandatory summer session. Southern New Hampshire's College for
America just began offering a $10,000 Bachelor Degree. Our FAST
Act proposes year-round Pell Grants, which would speed up the
time to finish a student's education, and therefore less debt.
Perhaps we might remind ourselves to stop allowing new Medicaid
mandates to force States to spend money on Medicaid that might
otherwise be spent on higher education, thereby keeping tuition
down.
The Federal efforts to deal with this issue haven't worked
very well. In 1990, the first and only debt-related
accountability was put in statute. Colleges with more than 30
percent of borrowers defaulting over a 3-year period or more
than 40 percent over a 1-year period are ineligible to receive
Federal student aid dollars, but a college with an 18 percent
cohort default rate is treated just the same as one with a 27
percent rate, so this may not work that well.
Second, the recent gainful employment regulation from this
administration is already a failure. It's a clumsy 945-page
regulation defining just two words, targeting only one section
of higher education. It establishes a complicated and arbitrary
definition of what an affordable amount of debt is.
Senator Reed, who will be testifying shortly, believes that
some colleges and universities should be responsible for a
portion of the defaulted loans of students. It's an important
framework worth considering. Others may have different ideas
about a skin-in-the-game policy. For me, what is clear is that,
as a matter of principle and fairness, all institutions,
whether public, private, or for-profit, should participate. I
don't believe any institution, whether public or private, not-
for-profit or for-profit, should be exempt from any requirement
that we may add to discourage over-borrowing and reduce college
costs.
It might be appropriate to consider establishing multiple
models of risk-sharing so that institutions with different
missions and different student populations have different ways
to comply.
We have a distinguished panel. I look forward to their
thoughts.
Senator Murray.
Opening Statement of Senator Murray
Senator Murray. Well, thank you very much, Mr. Chairman.
Senator Reed, it's great to see you here. I look forward to
your testimony. Thank you for the work you've been doing on
this issue.
I want to thank all of our witnesses who are here today. We
look forward to hearing from you.
Clearing pathways for more Americans to attend and succeed,
both in college and beyond, is, of course, important for our
students, but it's also a critical part of building an economy
that works for all of our families, not just the wealthiest
few. A highly educated workforce is good for our country. It
strengthens the middle class; it strengthens the workforce
we'll need to compete in the 21st century global economy. We
should work on ways to help more students earn their degree and
gain a foothold into the middle class.
Each year, Federal taxpayers invest $150 billion in our
higher education system. I welcome this hearing as a way to
talk about holding institutions of higher education more
accountable to ensure students and taxpayers get a good return
on their investment. The crushing burden of student debt is
going to be a major focus for me in our conversations on
reauthorizing the Higher Education Act.
When it comes to students who rely on loans to afford the
rising cost of college, we have a lopsided accountability
system. Right now, colleges and universities receive the up-
front benefit of money provided by those Federal student loans,
but students and taxpayers are the ones who bear nearly all the
risk and the consequences of default regardless of whether the
college or university served students well or kept their debt
levels affordable.
We've seen cases recently where some institutions have a
pattern of frequent student defaults or of pushing students
toward short-term solutions like deferment or forbearance where
their debt continues to balloon. Yet, the institution itself
bears little responsibility for their students' outcomes.
I am open to hearing more about options like risk-sharing
to ensure colleges and universities have a stake in their
students' success, debt levels, financial literacy, and ability
to repay.
Of course, there are key protections that need to be in
place. For example, we should recognize that risk-sharing could
lead some institutions to become more exclusive to reduce their
risk. Any proposal would have to be carefully crafted to avoid
unintended consequences and should reward institutions that
remain accessible and affordable. Any risk-sharing proposal
that comes before this committee should not be a way to roll
back other accountability measures.
We should continue to hold schools accountable for career
education programs that can leave students with worthless
credentials or with debt they can't repay. We should continue
to target our existing accountability requirements to our
colleges that have unacceptably high default rates and students
leaving with high loan debt. We should close loopholes to rules
that are supposed to prevent colleges from receiving more than
90 percent of their income from the Federal Government.
Quality programs and institutions should always have
students or employers willing to invest in them. In fact,
accountability is also an important component of some of the
broad themes I'm going to be very focused on in our discussion
of reauthorizing the Higher Education Act.
For example, all students should have access to a safe
learning environment. I hope this committee will focus on
making sure that colleges and universities are doing their part
to prevent sexual violence, assault, and bullying on campus.
Sexual assault turns students' lives upside-down, and we have
to do more to stop this crisis and prevent it in our Nation's
schools. This is going to be a top priority for families and
students across the country and for me.
We need to make college more affordable. This is first on
the minds of students and families. As I've mentioned, I
believe the Federal Government has a role to play in holding
States accountable for maintaining investments in higher
education. More students from all walks of life should have
strong, clear pathways into and through higher education. As
students and families shop for college, they should have access
to key information on the academic quality, affordability, and
outcomes of the colleges and universities they're interested
in.
Students across the country today are working really hard.
They are investing in higher education so they can have a solid
place in the middle class. We need to make sure we protect
those students and protect the integrity of the Federal
taxpayer dollars with strong accountability.
I'm looking forward to today's hearing about ideas and
feedback from our panels and our witnesses. Again, thank you
all for being here.
The Chairman. Thank you, Senator Murray.
To introduce our first panel, which has one witness, I'll
call on Senator Whitehouse.
Senator Whitehouse. Thank you, Chairman.
I'm honored to introduce my senior Senator. The committee
knows him well because he served with great distinction on this
committee for many years.
When Senator Reed became a powerful chairman on one of the
subcommittees of the powerful Appropriations Committee, he
vacated his seat on the HELP Committee, and I was able to fill
it. It can accurately be said that I have the Reed seat on the
HELP Committee, and I appreciate very much the work that Jack
has done in this area to align the incentives of those who
invest in and run our higher education facilities with the
interests of students, who want to have good outcomes in their
lives.
A business model that is successfully concluded when the
Federal checks are cashed is not an adequate business model for
higher education.
The people of Rhode Island are very proud of our senior
Senator, Jack Reed, and I'm pleased to introduce him to the
committee.
Statement of Senator Reed
Senator Reed. Thank you very much. Thank you, Mr. Chairman,
for providing this opportunity.
Senator Murray, thank you for your leadership, particularly
on this issue, which is critical.
I want to thank Senator Whitehouse. Yes, I've served on the
committee, but I've already been eclipsed by Senator Sheldon
Whitehouse of Rhode Island. Thank you.
Sheldon, I will admit that we both will forever dwell in
the shadow of Claiborne Pell. That is one of the realities of
the U.S. Senate and our history.
Again, thank you for inviting me to testify on what I
believe is a critical area of needed reform for our student aid
programs and higher education more broadly, requiring our
colleges and universities to bear greater responsibility for
student loan debt. Chairman Alexander has already taken a very
thoughtful approach to looking at this issue, as have others on
the committee, and I thank you all for your leadership.
We all know that post-secondary education is required for
most family sustaining middle-class jobs and that an educated
workforce is essential to a modern, productive economy. Yet,
just as there is growing recognition that post-secondary
education is indispensable in the modern economy, families are
being required to shoulder growing debt burdens that severely
impact the lives of borrowers to the point of threatening
access to college and restricting our Nation's economic growth
potential.
According to a recent analysis of student loan debt by the
Federal Reserve Bank of New York, between 2004 and 2014 there
was an 89 percent increase in the number of student loan
borrowers, and a 77 percent increase in the average balance
size. This is not only in absolute terms, but the trend line is
very disturbing about what's happening.
Today, over 40 million Americans have student loan debt,
with the outstanding balance exceeding $1.2 trillion. This is a
growing drag on our economy. As student loan debt has grown,
young adults have put off buying homes or cars, starting a
family, saving for retirement, or launching new businesses.
They have literally mortgaged their economic future.
We know that student loan borrowers are struggling, and
defaults are on the rise. The Federal Reserve Bank of New York
reported that the number of borrowers who default each year has
increased from about a half-million 10 years ago to 1.2 million
annually in 2011 and 2012. Only 37 percent of borrowers are
current on their loans and actively paying down their debt.
We cannot tackle the student loan debt crisis without
States and institutions also stepping up and taking greater
responsibility for college costs and student borrowing.
Institutions of higher education can take action to reduce the
likelihood that a student will default on a loan. However,
under current law, there is little incentive for them to do so
until default rates reach excessive levels, such as their 3-
year cohort default rate exceeds 30 percent for 3 years, as the
Chairman mentioned. In other words, nearly one in three
students would have to default by their third year of repayment
before an institution would be obligated to take any action.
The financial crisis showed us what happens when certain
players in the system can reap the rewards of easy credit
without having to bear any of the consequences of making
reckless, risky decisions. The players that created and sold
exotic financial products got rich, while middle-income
families lost their homes and taxpayers had to bail out the
financial system. They got the check and we got the bill. I
don't think that's right, and I think good business dictates
another approach.
We only have to look at Corinthian College to see that we
face a similar problem in the higher education sector. Students
have been left in the lurch and taxpayers on the hook because
of a business model based on maximizing enrollment and student
loan revenue with little responsibility or little regard for
the outcomes.
I introduced the Protect Student Borrowers Act with
Senators Durbin, Warren and Murphy--and I want to thank Senator
Warren for her great leadership on this issue and many other
issues--to ensure that institutions take greater financial
responsibility when it comes to student loan debt by setting
stronger market incentives for colleges and universities to
provide better and more affordable education to students, which
will in turn help put the brakes on rising student loan debt.
And I want to underline, emphasize ``market incentives,''
because the market can be made to work for us.
We introduced this legislation to move the conversation
forward, beyond whether institutions should bear greater
responsibility for student loan debt to how to design a system
that puts the right market incentives in place for them to
assume such responsibility. The Protect Student Borrowers Act
would hold colleges and universities accountable for student
loan defaults by requiring them to repay a percentage of
defaulted loans. Only institutions that have 25 percent or more
of their students borrowing would be included in this risk-
sharing based on their cohort default rate. So we've
established a limit. If we don't have an institution that
relies on student loans, we're not going to get you involved in
detailed regulation. If you have heavy student borrowing, you
should be into this system.
Risk-sharing requirements would kick in when the default
rate of these institutions exceeds 15 percent. As the
institution default rate rises, so too would the institution's
risk-share payment. It makes sense. If they're doing their best
to try to control the default rate, then they should be
protected. If they're doing poorly, they should pay more and
more.
These payments would be invested in helping struggling
borrowers, preventing future default and delinquency, and
reducing shortfalls in the Pell Grant program. We need to
tackle student loan debt and college affordability from
multiple angles, and we need all stakeholders in the system to
do their part. With the stakes so high for students and
taxpayers, it is only fair that institutions bear some of the
risk in the student loan program.
I commend Chairman Alexander and Senator Murray for putting
this topic on the reauthorization agenda. I look forward to
working closely with this committee and our colleagues, and I
am sure that with your leadership, we will reach success.
Thank you very much, Mr. Chairman.
[The prepared statement of Senator Reed follows:]
Prepared Statement of Senator Reed
I would like to thank Chairman Alexander, Ranking Member
Murray, and the members of the committee for inviting me to
testify on what I believe is a critical area of needed reform
for our student aid programs and higher education more
broadly--requiring our colleges and universities to bear
greater responsibility for student loan debt. Chairman
Alexander has taken a very thoughtful approach to looking at
this issue--as have others on this committee, and I thank you
all for your leadership.
We all know that postsecondary education is required for
most family sustaining, middle-class jobs, and that an educated
workforce is essential to a modern, productive economy.
Yet, just as there is growing recognition that
postsecondary education is indispensable in the modern economy,
families are being required to shoulder growing debt burdens
that severely impact the lives of borrowers to the point of
threatening access to college and restricting our Nation's
economic growth potential.
According to a recent analysis of student loan debt by the
Federal Reserve Bank of New York, between 2004 and 2014, there
was an 89 percent increase in the number of student loan
borrowers and a 77 percent increase in the average balance
size. Today, over 40 million Americans have student loan debt,
with the outstanding balance exceeding $1.2 trillion.
This is a growing drag on our economy. As student loan debt
has grown, young adults have put off buying homes or cars,
starting a family, saving for retirement, or launching new
businesses. They have literally mortgaged their economic
future.
We know that student loan borrowers are struggling. And
defaults are on the rise. The Federal Reserve Bank of New York
reported that the number of borrowers who default each year has
increased from about half a million 10 years ago to 1.2 million
annually in 2011 and 2012. Only 37 percent of borrowers are
current on their loans and actively paying down their debt.
We cannot tackle the student loan debt crisis without
States and institutions also stepping up and taking greater
responsibility for college costs and student borrowing.
Institutions of higher education can take action to reduce
the likelihood that a student will default on a loan. However,
under current law there is little incentive for them to do so
until default rates reach excessive levels such as their 3-year
cohort default rate exceeding 30 percent for 3 years. In other
words, nearly one in three students would have to default by
their third year in repayment before an institution would be
obligated to take action.
The financial crisis showed us what happens when certain
players in the system can reap the rewards of easy credit
without having to bear any of the consequences of making
reckless, risky decisions. The players that created and sold
exotic financial products got rich while middle-income families
lost their homes and taxpayers had to bail out the financial
system.
We only have to look at the collapse of Corinthian Colleges
to see that we face a similar problem in the higher education
sector. Students have been left in the lurch and taxpayers on
the hook because of a business model based on maximizing
enrollments and student loan revenue--with little
responsibility for outcomes.
I introduced the Protect Student Borrowers Act with
Senators Durbin, Warren, and Murphy to ensure that institutions
take greater financial responsibility when it comes to student
loan debt by setting stronger market incentives for colleges
and universities to provide better and more affordable
education to students, which will in turn help put the brakes
on rising student loan defaults.
We introduced this legislation to move the conversation
forward--beyond whether institutions should bear greater
responsibility for student loan debt to how to design a system
that puts the right market incentives in place for them to
assume such responsibility.
The Protect Student Borrowers Act would hold colleges and
universities accountable for student loan defaults by requiring
them to repay a percentage of defaulted loans. Only
institutions that have 25 percent or more of their students
borrow would be included in this risk sharing based on their
cohort default rate. Risk-sharing requirements would kick in
when the default rate exceeds 15 percent. As the institutional
default rate rises, so too would the institution's risk-share
payment. These payments would be invested in helping struggling
borrowers, preventing future default and delinquency, and
reducing shortfalls in the Pell Grant program.
We need to tackle student loan debt and college
affordability from multiple angles. And we need all
stakeholders in the system to do their part. With the stakes so
high for students and taxpayers, it is only fair that
institutions bear some of the risk in the student loan program.
I commend Chairman Alexander and Senator Murray for putting
this topic on the reauthorization agenda. I look forward to
working closely with this committee and our colleagues on
refining the risk-sharing concept and including tough, fair,
and workable provisions in the Higher Education Act to ensure
that we truly have shared responsibility for student success.
Thank you.
The Chairman. Thanks, Senator Reed. Thank you for taking
time to come today. I know you have a busy schedule and you
have to leave now, but let me invite you, even though you're
not a member of the committee, to stay involved with us as we
work through the reauthorization of the Higher Education Act.
This is an important contribution, and if we're able to work
out some fair way to do it, it would be a real change in our
student loan program. Thanks very much.
I will ask our second panel to come forward, and while
you're coming I'll introduce you.
Our first witness is Dr. Andrew Kelly, resident scholar and
director of the Center for Higher Education Reform at the
American Enterprise Institute. Dr. Kelly's work is focused on
innovation in higher education, financial aid reform, and the
politics of education policy.
Our next witness is Mr. Robert Silberman, executive
chairman of Strayer Education. Mr. Silberman leads Strayer
University, a 123-year-old regionally accredited university
serving approximately 41,000 working adults across the country.
He is a graduate of Dartmouth College, received his Master's
Degree in International Relations from Johns Hopkins. From 1989
to 1993 he served in several senior positions in the U.S.
Department of Defense, including Assistant Secretary of the
Army.
Our third witness is Jennifer Wang, policy director for
Young Invincibles. In her role at Young Invincibles, Ms. Wang
advocates for health care and education-related policy that
expands economic opportunity for young adults. She earned her
undergraduate degree from the University of California at Los
Angeles, her law degree from the University of Iowa.
I'm going to ask Senator Casey to introduce our final
witness.
Statement of Senator Casey
Senator Casey. Thank you, Mr. Chairman.
Mr. Chairman, I'm pleased to have the opportunity to
introduce Dr. Douglas Webber. Dr. Webber serves as assistant
professor at Temple University in Philadelphia, PA, and as a
research fellow at the Institute for the Study of Labor. He's
been a leading voice in the economics of higher education, and
he's extensively published on issues ranging from the gender
pay gap to the economic benefits of college. His work has
appeared in scholarly journals such as the Journal of Policy
Analysis, Labor and Economics, and the Economics of Education
Review, as well as other media outlets such as the Chronicle of
Higher Education.
Dr. Webber holds a Bachelor's Degree in Economics and
Mathematics from the University of Florida, as well as a
Master's and Ph.D. in Economics from Cornell University. Prior
to becoming Professor at Temple, he worked as an economist at
the Center for Economic Studies at the U.S. Census Bureau. Dr.
Webber's contributions over the years have provided much of the
foundation for the discussions we'll have today, and I look
forward to his testimony.
Thank you, Dr. Webber.
The Chairman. Thanks, Senator Casey.
Why don't we start with Dr. Kelly. We'll work right down
the line. If each of you could summarize your comments in about
5 minutes, that will give the Senators more time to have a
conversation with you.
Dr. Kelly.
STATEMENT OF ANDREW P. KELLY, A.B., M.A., Ph.D., DIRECTOR,
CENTER FOR HIGHER EDUCATION REFORM, AMERICAN ENTERPRISE
INSTITUTE, WASHINGTON, DC
Mr. Kelly. Good morning, Chairman Alexander, Ranking Member
Murray, and distinguished members of the committee. Thank you
for giving me the opportunity to share my views on risk-sharing
in higher education.
As Chairman Alexander introduced me, my name is Andrew
Kelly. I'm the director of the Center on Higher Education
Reform at the American Enterprise Institute, a non-profit, non-
partisan research organization based here in Washington, DC. My
comments today are my own and do not necessarily reflect the
views of AEI.
Before discussing risk-sharing, it is important to provide
some context. For the past half-century, the primary focus of
Federal student aid programs has been ensuring college access
through grants and loans. While this policy has increased
enrollments, it has also weakened incentives for institutions
to promote student success and contain costs. The result is
evident in lackluster graduation rates, skyrocketing prices,
and high delinquency rates on student loans.
This is true, in part, because the mechanisms designed to
hold institutions accountable for poor performance have fallen
short of expectations. Consider, for example, the Federal
Government's primary means of ensuring that student aid flows
to quality programs, the cohort default rate. The measure is
easily gamed because colleges are held harmless for any loan
defaults that occur outside of a 3-year window. This creates an
incentive to enroll borrowers in forbearance on deferment to
keep them from defaulting, but those borrowers do not make any
progress in paying down their loans. As a result, just eight
institutions were subject to sanction in 2013.
The rule is also binary in nature, meaning colleges just
below the Federal standard continue to have full access to
Federal aid programs, while those just above lose eligibility
entirely. Those institutions whose default rates are high but
below the threshold have little reason to improve. Under
existing policies, then, most colleges bear little risk if
their students can't repay their loans.
A risk-sharing policy would change that equation. Colleges
and universities that receive Federal loans would be on the
hook financially for a portion of the loans their students
failed to pay back. The intent of a risk-sharing policy is to
give all colleges, not just those with the highest default
rates, stronger incentives to serve students well and keep
tuition low. The idea here is to change college behavior by
changing the incentives they face, not by imposing top-down
mandates about whom colleges must enroll and how much they
charge.
Institutions may respond to risk-sharing systems in
different ways. Schools would likely be more conscientious
about not enrolling students with little chance of success.
While this would often be an improvement in consumer
protection, it also has consequences for college access that I
will discuss later.
The truth is, the most important predictor of loan
repayment is degree completion. Colleges that wish to improve
their risk profile would respond by restructuring the student
experience so as to maximize success. Researchers and
institutions are learning more about interventions and
practices that improve retention and completion rates, and
school leaders can use this information to reform their
institutions.
Finally, schools would have additional incentive to contain
costs, as higher tuition levels will make it more difficult for
students to repay their loans.
There are a number of design principles to consider here.
First, leaders might consider moving away from default rates,
which are imperfect measures of loan performance. Existing
protections help borrowers avoid defaulting, but that does not
mean that they are making progress in paying down their loans.
A measure of repayment progress would provide a more
comprehensive picture of loan performance.
Second, the simplest design would be to charge schools a
flat percentage of non-performing loans. Alternatively, a
sliding scale of penalties would punish poor performing
institutions more severely, but designers should avoid
arbitrary thresholds that divide otherwise similar
institutions.
Third, risk-sharing payments may not need to be that large
to get the attention of schools. One study of the mortgage
market found sizable differences in loan performance with risk
retention as low as 3 percent. Too large a payment risks
putting colleges that could otherwise improve out of business
before they have the chance to do so.
Fourth, an ideal risk-sharing system would apply equally
across all institutions regardless of tax status or other
factors such as borrowing rates. We should have high
expectations for all colleges, not a risk-sharing system
riddled with exemptions for particular types of institutions.
I'll conclude with two important caveats. First and most
importantly, risk-sharing raises legitimate questions about
access for low-income students. Ideally, Federal aid policy
would encourage students to enroll in institutions at which
they are likely to be successful. Right now, colleges have an
incentive to fill seats, but that is often access in name only.
Risk-sharing would both encourage institutions to think
carefully about who they are well-equipped to serve and ensure
the students they do enroll are successful.
To ensure continued access, however, policymakers should
consider paying institutions a bonus for every Pell Grant
recipient they graduate. Such a bonus would help balance the
risk of enrolling low-income students.
Second, a risk-sharing system should recognize that many
factors are outside of an institution's control. For instance,
colleges cannot limit how much students borrow over the cost of
tuition, meaning a poorly designed risk-sharing system would
hold them accountable for behavior they cannot control. An
ideal risk-sharing policy would find a way to disaggregate
tuition and living expenses. Likewise, colleges cannot control
economic trends that control loan repayment. Therefore,
policymakers could tie a risk-sharing formula to the national
unemployment rate to take account of economic conditions.
I appreciate the opportunity to provide feedback, and I
look forward to the discussion.
[The prepared statement of Dr. Kelly follows:]
Prepared Statement of Andrew P. Kelly, A.B., M.A., Ph.D.
summary
Federal student aid programs have increased college access, but
lackluster outcomes and skyrocketing tuition suggest that they do not
provide colleges with incentive to promote student success and college
affordability. In the search for reforms that would improve those
incentives, leaders on both sides of the aisle have shown interest in
the concept of risk-sharing, under which colleges who participate in
the Federal loan program would be on the hook financially in the event
their students fail to pay back their loans.
The intent of a risk-sharing policy is to give all colleges--not
just those with the highest default rates--stronger incentive to
consider changes to institutional practice, resource allocation, and
tuition pricing that would lower the probability that borrowers
experience problems in repaying their loans. Risk-sharing is thus
designed to change institutional behavior by holding colleges
accountable for student outcomes. Colleges would have the flexibility
to figure out the best way to ensure that students can repay their
loans.
Institutions may respond to a risk-sharing system in different
ways. Schools would likely be more careful about enrolling students who
have little chance of success. While this would be an improvement in
consumer protection, it also has consequences for college access. But
the most important determinant of loan repayment is degree completion,
and colleges that wish to improve their risk profile would respond by
restructuring the student experience so as to maximize success.
Researchers and institutions are learning more about interventions and
practices that improve retention and completion rates, and school
leaders can use this information to improve.
There are a number of design principles the committee could
consider when thinking about the structure of a risk-sharing policy.
First, leaders might consider moving away from cohort default rates,
which are imperfect measures of school quality and loan performance,
and toward other options like a measure of repayment progress. Second,
the simplest design would be to charge schools a flat percentage of
non-performing loans. A sliding scale of penalties would punish poor-
performing institutions more severely, but designers should avoid sharp
thresholds. Third, risk-sharing penalties may not need to be large to
get the attention of schools. Fourth, an ideal risk-sharing system
would apply equally across all institutions regardless of tax status or
other factors such as borrowing rates. Fifth, the system should account
for the many factors outside an institution's control such as economic
conditions.
There are a few caveats to a risk-sharing policy. The potential
consequences for access must be taken seriously. In many cases,
encouraging institutions to think twice about enrolling students that
are unlikely to be successful is not a bad thing, and those students
would still have access to institutions that would serve them better.
In order to ensure access, leaders could consider paying institutions a
bonus for every Pell Grant recipient they graduate.
Colleges also have justifiable concerns that risk-sharing would
hold them accountable for behaviors they have no control over. In light
of this, an ideal risk-sharing policy would find a way to disaggregate
loans that paid for tuition and loans that paid for living expenses.
Policymakers might also consider giving institutions some control over
how much students are able to borrow above the cost of tuition.
______
introduction
Good morning, Chairman Alexander, Ranking Member Murray, and
distinguished Members of the committee, and thank you for giving me the
opportunity to share my views on the concept of risk-sharing in higher
education.
My name is Andrew Kelly and I am the director of the Center on
Higher Education Reform at the American Enterprise Institute, a non-
profit, non-partisan public policy research organization based here in
Washington, DC. My comments today are my own and do not necessarily
reflect the views of AEI.
I'm here today to discuss how the Federal Government can give the
colleges and universities it helps to finance a greater stake in
student success and college affordability. Specifically, the question
before us today is how a risk-sharing policy, where colleges would bear
some financial responsibility for a portion of the Federal loans that
their students do not repay, might better align the incentives of
colleges, students, and taxpayers. This idea has received increasing
attention from both sides of the aisle of late, and it is an opportune
time to discuss it.
Today I will start by briefly outlining the problems with our
current approach to determining student aid eligibility, explaining the
principles of risk-sharing and why I believe it would represent an
improvement over the status quo, and discussing basic policy design
principles the committee could consider. I will conclude with some
important caveats that we must keep in mind.
Over the past half-century, Federal higher education policy has
been focused on ensuring college access for qualified students who
would otherwise be unable to attend due to financial constraints. To
achieve this goal, the Federal Government makes available grants and
loans to any eligible student pursuing education after high school.
This is an admirable objective. After all, the average return to
completing a degree or certificate remains robust, lower income
Americans who earn a degree are more likely to experience upward
mobility, and a more-educated population helps grow the economy.\1\
Evidence suggests that Federal need-based grants encourage
enrollment among low-income students,\2\ and the marked increase in
college access at all income levels reflects the expansion of the
Federal student aid system. In 1972, the year the Pell Grant was
created, 49 percent of recent high school graduates went on to enroll
in postsecondary education; by 2012, 66 percent had done so.\3\
However, Federal policy has paid less attention to whether these
student aid investments promote student success and encourage colleges
to keep their tuition affordable. On each of these measures, the trends
are far from encouraging. Research shows that college completion rates
have declined over time,\4\ and just over half of the students who
start a degree or certificate graduate within 6 years.\5\ Completion
rates are much lower among disadvantaged students.\6\
Meanwhile, the sticker price of tuition at public 4-year colleges
has more than tripled since the early 1980s. Though net prices have
increased more slowly, family incomes have not kept pace, putting
college out of reach for many and forcing others to take on large
amounts of debt. In 2013, 70 percent of graduates from public and
nonprofit colleges had student loan debt, and the average borrower owed
just under $30,000.\7\ Those who take on debt but do not graduate often
have the most difficulty repaying their loans. The effective
delinquency rate on student loans, after excluding students who are not
required to make payments, is over 30 percent, about as high as it was
on subprime mortgages during the housing crisis.\8\
Borrowing itself is not inherently bad: if a loan enables an
individual to pursue a high-quality postsecondary credential that he or
she would not otherwise have been able to afford, then the loan is
advancing economic opportunity. But when students borrow for programs
that are unlikely to deliver a positive return on investment, it is
easy for them to find themselves in the worst place of all: saddled
with debt but without a credential to advance their career. The ranks
of these borrowers are growing.
Faced with these trends, policymakers are now asking how Federal
student aid policy can encourage colleges to provide a quality
education at an affordable price.
Leaders of both parties have acknowledged that these are not
entirely, or even mostly, questions about how much we spend, but about
how we change the incentives that existing programs create for
colleges. There is a growing consensus in States and at the Federal
level that improving student success and college affordability requires
reforms that better align the incentives of institutions and students.
A host of initiatives, from outcomes-based funding in the States to
President Obama's college ratings to the recent white papers released
by this committee, fit under this broad category.
A key question is whether existing Federal policies provide
colleges with enough of a stake in student success. To be sure, the
policymakers who designed the student aid system a half-century ago did
not ignore these questions. They set up a three-pronged quality
assurance regime--known as the ``triad''--to govern eligibility for
Federal aid programs. Today, institutions must be accredited by a
recognized organization, authorized by any State they operate in, and
must meet Federal standards for financial viability, student loan
default rates, and, in the case of for-profit institutions, the
proportion of their revenue that comes from non-Federal sources (the
``90/10 rule'').
Above these quality assurance standards, market competition is
supposed to discipline providers. Policymakers decided to give aid
directly to students as a portable voucher, allowing them to ``vote
with their feet'' and reward schools that offer affordable, high-
quality programs. In the aggregate, these choices are supposed to hold
eligible colleges and universities accountable for their performance.
These quality assurance mechanisms have failed to protect consumers
or taxpayers, however.\9\ Low levels of consumer information about
costs and quality, coupled with a dearth of clear, comparable data on
those dimensions, blunts market accountability.\10\ Basic information
on out-of-pocket costs, the percentage of students who complete a
degree, or the likely return on investment at different programs is
incomplete or unavailable. Programs with high price tags and poor
outcomes continue to attract students and taxpayer dollars.
The triad has also proven ineffective in its gatekeeping role.
According to the most recent data available from the Integrated
Postsecondary Education Data System (IPEDS), over 1,300 aid-eligible 2-
and 4-year colleges graduated less than 30 percent of their first-time,
full-time students in 150 percent of the normal time to degree. When it
comes to finishing on time, more than 750 4-year colleges had 4-year
completion rates of 20 percent or lower. Similarly, among those
institutions receiving Federal loan dollars, nearly 500 schools had 3-
year Cohort Default Rates (CDR) of 25 percent or higher in 2014.
Each part of the triad has its own shortcomings. Accreditation
reviews rely on faculty from other institutions to evaluate their
peers, creating a conflict of interest. It is also a binary measure,
and the high stakes of revoking a school's accreditation mean it rarely
happens. A Government Accountability Office (GAO) analysis found that
just 1 percent of accredited institutions lost their accreditation over
a 4\1/2\-year period.\11\ State regulations vary considerably across
the country, and few States authorize institutions on the basis of
their student outcomes.
At the Federal level, the primary mechanism for holding colleges
accountable--the Cohort Default Rate--successfully curbed the worst
instances of fraud and abuse when first introduced in the 1990s. But
the policy is flawed. First, it is easily gamed. So long as students
default outside of the 3-year window, colleges are held harmless for
that failure, creating incentive to get students just over that 3-year
threshold. Indeed, when the Department of Education shifted from 2-year
to 3-year default rates, loan performance was much worse in the 3-year
window. The average default rate jumped 4.6 percentage points.
Second, the rule is binary in nature: colleges whose default rates
are just below the Federal standard (40 percent in a given year or 30
percent over 3 consecutive years) continue to have full access to
Federal aid programs. Those institutions that are close to the
threshold likely have incentive to improve in order to avoid sanction
in the future. But the mass of institutions with default rates that are
high but still below the thresholds bear no responsibility for loans
that go into default. There is nothing magical about the thresholds,
yet policy treats colleges on either side of them completely
differently.
Third, the binary element also makes the measure extremely high-
stakes; losing access to title IV aid would essentially be a death
sentence for colleges. An entire industry has evolved to help colleges
manage their defaults within the 3-year window, and institutions have a
host of opportunities to challenge and appeal the Department of
Education's ruling. Policymakers have been reticent to sanction schools
under the policy. Just eight institutions were subject to sanction in
2013.\12\ This past year, the Department of Education revised the
default rates of a subset of institutions on the basis of concerns
about inadequate loan servicing, effectively saving them from
sanction.\13\
Thus, existing policies have given rise to a system where colleges
that effectively originate student loans bear little of the risk if
borrowers are then unable to pay those loans back. This creates little
incentive for poorly performing colleges to keep tuition low, enroll
students who are likely to be successful, or change institutional
practice so as to maximize student success.
To be clear: student success is a joint product of student effort
and institutional practice. And institutions have only limited control
over whether students arrive prepared for college, how much students
decide to borrow above the cost of tuition, or their behavior during
and after college. I discuss these caveats below.
But evidence suggests that colleges do have an effect on student
success;\14\ that institutions who adopt research-based interventions
can improve retention and completion rates;\15\ and that it is possible
to contain costs without sacrificing quality.\16\ The question is how
to structure Federal policies to encourage colleges to focus effort and
resources on these goals.
risk-sharing
A risk-sharing policy would change these incentives for all
colleges. Risk-sharing here refers to a policy that would require all
colleges who participate in the Federal loan program to retain some
portion of the risk that their students will be unable to repay their
loans. Specifically, colleges would be on the hook financially to pay
back a fraction of the loans that their students fail to repay. In the
parlance of other lending markets, colleges would have some ``skin in
the game'' when it comes to student loans.
The intent of such a policy is to give all colleges--not just those
with the highest default rates--stronger incentive to consider changes
to institutional practice, resource allocation, and tuition pricing
that would lower the probability that borrowers experience problems in
repaying their loans. Risk-sharing is thus designed to change
institutional behavior by holding colleges accountable for student
outcomes, not dictating specific changes from Washington. Colleges
would maintain the flexibility to figure out how best to accomplish
student success goals.
How might such a policy play out in higher education? It is worth
noting that the concept of risk-sharing has received significant
attention in other lending markets, particularly in the context of home
loans. Evidence from the period before and after the financial crisis
suggests that the loan portfolios of mortgage lenders who had some skin
in the game--as little as 3 percent of the risk--performed better than
those who did not.\17\ In a comparative study of loan performance in
the Veteran's Affairs (VA) and Federal Housing Administration (FHA)
loan programs, researchers at the Urban Institute found that VA loans
were less likely to default than FHA loans. The researchers hypothesize
that the fact that lenders in the VA program have skin in the game
likely explains some of the difference in performance (though they
caution that they establish a correlation, not causation).\18\
Because similar variation is not present in Federal student loans,
it is more difficult to project how this policy would play out in
American higher education. But a recent paper by Temple University
economist Douglas Webber attempted to simulate how different types of
institutions might respond to a risk-sharing system, namely whether
they would price risk-sharing into their tuition costs. Webber's
simulation suggests that a risk-sharing system where colleges had to
pay back 20 percent or 50 percent of defaulted loans would ``bring
about a sizable reduction in student loan debt,'' though at the cost of
``modestly higher tuition rates.''\19\ Webber shows that if colleges
were able to reduce their default rates even 10 percent, the reduction
in loan debt would be even larger.
Webber's simulation of a 10 percent reduction in default rates is
likely a conservative estimate of the extent to which proactive
institutions could improve loan repayment rates. Indeed, there are a
number of strategies colleges could pursue in this regard.
First, broad-access colleges could raise entrance standards and be
more careful about enrolling students who have little chance of
success. This would be an improvement in consumer protection; students
should not enroll at an institution that cannot serve them effectively.
But such a response also has consequences for access that I discuss
below.
Second, some colleges will likely change their pricing and
enrollment policies to minimize the number of students that wind up
with debt but no degree. One approach is to implement a free or low-
cost ``trial period'' that allows students to test the waters before
they take on any debt. For instance, in the aftermath of the Obama
administration's effort to regulate for-profit colleges, Kaplan
University introduced a free, 3-week trial.\20\ Another option is to
have students start taking courses with a lower-cost provider before
transferring those credits to the home institution. Western Governors
University has partnered with online course provider StraighterLine to
provide this kind of low-risk on-ramp for prospective students.\21\
Third, and most importantly, colleges will have incentive to
restructure the student experience in ways that maximize student
success. The most effective way to help students avoid repayment
problems is to help them complete a credential with labor market
value.\22\ A series of rigorous, randomized evaluations has provided
evidence that different interventions can raise retention and
completion rates--personalized coaching, performance-based grant aid,
full-time enrollment in a ``structured pathway.''\23\ A comprehensive
intervention that combined many of these strategies doubled graduation
rates among remedial students at the City University of New York.\24\
Improvements are possible, provided colleges have an incentive to adopt
evidence-based strategies. Having skin in the game could provide that
incentive.
design principles
There are a number of design principles and caveats that the
committee could consider when thinking about the structure of a risk-
sharing policy. I start with four design principles and conclude with
two important caveats.
First, leaders might consider moving away from cohort default rates
as the key measure. On the one hand, putting institutions on the hook
for a fraction of defaulted dollars is transparent, simple, and clearly
pegged to a defined outcome. But default rates are highly imperfect
measures of institutional quality and loan performance.\25\ Options
like forbearance, deferment, and income-based repayment help students
avoid defaulting even if they are not making progress in paying back
their loans. As an alternative, policymakers could use a measure of
repayment progress, such as cohort's loan balance that remains unpaid
after the standard 10-year repayment period.
Second, in terms of the structure of penalties, the simplest
approach would be to charge institutions a flat percentage of non-
performing loans, perhaps excluding institutions whose repayment rates
are above a certain threshold. For example, institutions might pay a
flat percentage of a cohort's loan balance that remains at the end of
the standard 10-year repayment window. Alternatively, a sliding scale
of penalties that increased as repayment rates worsened would punish
poor-performing institutions more severely, but policymakers would want
to avoid a system that ratchets up penalties at particular thresholds
in a way that creates large discontinuities.
Third, while it is difficult to forecast in advance, it is my
opinion that risk-sharing penalties need not be particularly large to
get the attention of schools. One study of the mortgage market found
marked differences in loan performance with risk retention as low as 3
percent.\26\ In higher education, the system should be designed to
provide schools with an incentive to focus on student success, but
penalties should not be so large as to summarily put schools out of
business simply because they have cash-flow issues.
Fourth, it would be ideal to create a system that is simpler, more
transparent, and that applies equally across all institutions
regardless of tax status or other factors such as borrowing rates. We
should have high expectations for all institutions, and a risk-sharing
system can help achieve that goal so long as it is not riddled with
provisions that exempt particular types of institutions.
Fifth, there are clearly many factors outside an institution's
control--such as economic recessions. Tying the risk-sharing formula to
the national unemployment rate, for instance, and exempting a fraction
of non-performing loans from an institution's calculation based on that
index, would help account for this risk.
caveats
Now for the caveats. The most obvious criticism is that risk-
sharing will reduce access for low-income students. This is a likely
outcome at some schools, and must be taken seriously. But it's
important to note that, in many cases, encouraging institutions to
think twice about enrolling students that are unlikely to be successful
is not necessarily a bad thing. For years, colleges have knowingly
enrolled such students in order to capture additional student aid
money, a practice that members of this committee criticized during
prior hearings on for-profit colleges.\27\ It is also important to note
that these students would still have access to institutions where they
are more likely to be successful. Federal policy should encourage
students to enroll in institutions that are prepared to serve them.
But it is true that increased selectivity could keep out students
that would benefit from schooling on the basis of their
characteristics. Therefore, policymakers should consider offering
institutions a bonus for every Pell Grant recipient they graduate. Such
a reward would help balance the potential risk of enrolling low-income
students.
Colleges also have justifiable concerns that risk-sharing would
hold them accountable for behaviors they have no control over. For
instance, colleges cannot limit how much students are allowed to borrow
over the cost of tuition, meaning a poorly designed risk-sharing system
would put them on the hook for loans that were not used to pay tuition.
In light of this, a risk-sharing policy should only hold colleges
responsible for a portion of the total sum of unpaid loan dollars. The
penalty formula could multiply that sum by the ratio between tuition
and living costs for that cohort. Similarly, colleges should not be
punished for ineffective loan servicing.
Alternatively, the committee might consider giving schools the
power to limit student borrowing under certain circumstances. For
guidance on this issue, policymakers could look to the Department of
Education's current experimental sites project that empowers selected
colleges to limit borrowing.\28\
I appreciate the opportunity to provide feedback. I am enthusiastic
about the committee's focus on this topic and believe a well-designed
risk-sharing system can help to better align the incentives of
institutions and their students.
References
1. See, for instance, Pew Economic Mobility Project, ``Pursuing the
American Dream: Economic Mobility Across Generations,'' (Washington,
DC: Pew Charitable Trusts, 2012); Claudia Goldin and Lawrence Katz, The
Race Between Education and Technology (Cambridge, MA: Harvard
University Press, 2008).
2. Susan M. Dynarski and Judith Scott-Clayton, ``Financial Aid
Policy: Lessons from Research,'' Postsecondary Education in the United
States 23, no. 1 (Spring 2013), www.princeton.edu/futureofchildren/
publications/docs/23_01_04.pdf.
3. Institute of Education Sciences, National Center for Education
Statistics, ``Recent High School Completers and their Enrollment in 2-
year and 4-year Colleges, by Sex: 1980 through 2012,'' https://
nces.ed.gov/programs/digest/d13/tables/dt13_302.10.asp.
4. John Bound, Michael F. Lovenheim, and Sarah Turner, ``Why Have
College Completion Rates Declined? An Analysis of Changing Student
Preparation and Collegiate Resources,'' American Economic Journal:
Applied Economics 2, no. 3 (2010).
5. Doug Shapiro, et al., Completing College: A National View of
Student Attainment Rates--Fall 2007 Cohort (Herndon, VA: National
Student Clearinghouse, December 2013), http://nscresearchcenter.org/wp-
content/uploads/NSC_Signature_
Report_6.pdf.
6. Martha J. Bailey and Susan M. Dynarski, ``Gains and Gaps:
Changing Inequality in U.S. College Entry and Completion,'' (working
paper no. 17633, National Bureau of Economic Research, Cambridge, MA,
December 2011), www.nber.org/papers/w17633.pdf.
7. The Institute for College Access and Success (TICAS), Student
Debt and the Class of 2013, (TICAS, November 2014), http://ticas.org/
sites/default/files/legacy/fckfiles/pub/classof2013.pdf.
8. Meta Brown, et al., Measuring Student Debt and Its Performance
(New York, NY: Federal Reserve Bank of New York, April 2014),
www.newyorkfed.org/research/staff_reports/sr668.pdf; On subprime
mortgages, see Shane M. Sherlund, ``The Past, Present, and Future of
Subprime Mortgages,'' Finance and Economics Discussion Series, Division
of Research & Statistics and Monetary Affairs (Washington, DC: Federal
Reserve Board), http://www.Federalreserve.gov/pubs/feds/2008/200863/
200863pap.pdf.
9. Andrew P. Kelly and Kevin James, ``Untapped Potential: Making
the Higher Education Market Work for Students and Taxpayers,''
(Washington, DC: AEI, October 2014), www.aei.org/wp-content/uploads/
2014/10/Untapped-Potential-corr.pdf.
10. Andrew P. Kelly, High Costs, Uncertain Benefits: What Do
Americans Without a College Degree Think About Postsecondary Education
(Washington, DC: AEI, April 2015); Andrew P. Kelly, ``Nothing but Net:
Helping Families Learn the Real Price of College,'' AEI Education
Outlook (December 2011), www.aei.org/wp-content/uploads/2011/12/-
nothing-but-net-helping-families-learn-the-real-price-of-college_
084809849714.pdf; Laura J. Horn, Xianglei Chen, and Chris Chapman,
Getting Ready to Pay for College: What Students and Their Parents Know
About the Cost of College Tuition and What They Are Doing to Find Out
(Washington, DC: National Center of Education Statistics, September
2003), http://nces.ed.gov/pubs2003/2003030.pdf.
11. Government Accountability Office, Education Should Strengthen
Oversight of Schools and Accreditors (Washington, DC, December 2014),
www.gao.gov/assets/670/667690.pdf. Cite GAO study on accreditation
oversight.
12. Federal Student Aid, ``FY2011 2-Year Schools Subject to
Sanction,'' www.ifap.ed.gov/eannouncements/attachments/
2013OfficialFY112YRCDRBriefing
.pdf.
13. Jeff Baker, ``Adjustment of Calculation of Official Three Year
Cohort Default Rates for Institutions Subject to Potential Loss of
Eligibility,'' Information for Financial Aid Professionals, Federal
Student Aid, September 23, 2014, www.ifap.ed.gov/
eannouncements/
092314AdjustmentofCalculationofOfc3YrCDRforInstitutSubtoPotent
ialLossofElig.html.
14. Robert K. Toutkoushian and John C. Smart, ``Do Institutional
Characteristics Affect Student Gains from College?,'' The Review of
Higher Education 25, no. 1 (2001): 39-61, https://muse.jhu.edu/
login?auth=0&type=summary&url=/journals/review_of_higher_education/
v025/25.1toutko ushian.html; Thomas Bailey, et al., The Effects of
Institutional Factors on the Success of Community College Students (New
York, NY: Community College Research Center, Teachers College, Columbia
University, January 2005), http://ccrc.tc.columbia.edu/media/k2/
attachments/effects-institutional-factors-success.pdf.
15. Eric P. Bettinger and Rachel B. Baker, ``The Effects of Student
Coaching: An Evaluation of a Randomized Experiment in Student
Advising,'' Educational Evaluation and Policy Analysis 42, no. 7
(October 2013): 1-17; Nicole M. Stephens, MarYam G. Hamedani, and
Mesmin Destin, ``Closing the Social-Class Achievement Gap: A
Difference-Education Intervention Improves First-Generation Students'
Academic Performance and All Students' College Transition,''
Psychological Science 25, no. 4 (2014),
www.psychology.northwestern.edu/documents/destin-achievement.pdf.
16. Carol A. Twigg, Improving Learning and Reducing Costs: Lessons
Learned from Round I of the Pew Grant Program in Course Redesign
(Saratoga Springs, NY: The National Center for Academic Transformation,
2003), www.thencat.org/PCR/Rd1Lessons.pdf.
17. Benjamin J. Keys, et al., ``Did Securitization Lead to Lax
Screening? Evidence from Subprime Loans,'' Quarterly Journal of
Economics 125, no. 1 (2010): 307-62; Cem Demiroglu and Christopher
James, ``How Important is Having Skin in the Game? Originator-Sponsor
Affiliation and Losses on Mortgage-backed Securities,'' The Review of
Financial Studies (September 2012).
18. Laurie Goodman, Ellen Seidman, and Jun Zhu, VA Loans Outperform
FHA Loans. Why? And What Can We Learn? (Washington, DC: The Urban
Institute, July 2014), www.urban.org/sites/default/files/alfresco/
publication-pdfs/413182-VA-Loans-Outperform-FHA-Loans-Why-And-What-Can-
We-Learn-.PDF.
19. Douglas A. Webber, Risk-Sharing and Student Loan Policy:
Consequences for Students and Institutions (Bonn, Germany: The
Institute for the Study of Labor (IZA), February 2015), p. 3, http://
ftp.iza.org/dp8871.pdf.
20. Paul Fain, ``More Selective For-Profits,'' Inside Higher Ed,
November 11, 2011, www.insidehighered.com/news/2011/11/11/enrollments-
tumble-profit-colleges.
21. Paul Fain, ``Outsourced Trial Period,'' Inside Higher Ed,
January 6, 2015, https://www.insidehighered.com/news/2015/01/06/
western-Governors-deepening-partnership-straighterline-creates-new-
path-completion.
22. Jacob P. K. Gross, et al., ``What Matters in Student Loan
Default: A Review of the Research Literature,'' Journal of Student
Financial Aid 39, no. 1 (2009), http://publications.nasfaa.org/cgi/
viewcontent.cgi?article=1032&context=jsfa.
23. See the Institute for Education Science's ``What Works
Clearinghouse'' section on postsecondary education for information on a
series of rigorous evaluations: http://ies.ed.gov/ncee/wwc/
Topic.aspx?sid=22.
24. Susan Scrivener and Michael J. Weiss, ``More Graduates: Two-
Year Results from an Evaluation of Accelerated Study in Associate
Programs (ASAP) for Developmental Education Students,'' MDRC, January
2014.
25. Ibid.
26. Demiroglu and James, 2012.
27. U.S. Senate Health, Education, Labor, and Pensions Committee,
For Profit Higher Education: The Failure to Safeguard the Federal
Investment and Ensure Student Success (Washington, DC, July, 30, 2012),
www.help.senate.gov/imo/media/for_profit_report/PartI-PartIII-
SelectedAppendixes.pdf.
28. See Federal Student Aid Experimental Sites Initiative,
``Limiting unsubsidized loan amounts,'' https://
experimentalsites.ed.gov/exp/approved.html.
The Chairman. Thanks, Dr. Kelly.
Mr. Silberman.
STATEMENT OF ROBERT S. SILBERMAN, B.A., M.A., EXECUTIVE
CHAIRMAN, STRAYER EDUCATION, INC., HERNDON, VA
Mr. Silberman. Thank you, Chairman Alexander and Ranking
Member Murray and other distinguished members of the committee.
It's an honor to be here today with your committee, and I
appreciate you asking for my views on this important issue.
The institution I have the privilege to represent, Strayer
University, has been educating students for 123 years. It is
accredited by the Middle States Commission on Higher Education,
the same accrediting body that accredits Princeton, Georgetown,
Johns Hopkins, the University of Maryland, and other
outstanding schools in the mid-Atlantic region.
Strayer University currently educates 41,000 adult
students, primarily in Bachelor and Master Degree programs in
business, accounting, and information technology. Our numerous
successful graduates include members of the military such as
retired Assistant Commandant of the Marine Corps, General
Robert Magnus; senior Federal Government officials such as Hon.
Kathryn Medina, former Executive Director at the U.S. Office of
Personnel Management; and thousands of senior business
executives from industries and companies all over the country.
I note that the former chairman of your committee, Senator
Tom Harkin, said in his recent extensive report that our
``institution's performance, measured by student
withdrawal and default rates, is one of the best of any
examined, and it appears that students are faring well
at this degree-based college.''
I recount all this not just because I'm obviously proud of
our university, our students and our alumni, but more
importantly to illustrate that Strayer University, in all
relevant respects, is comparable to all other non-profit
universities which are accredited by Middle States.
I firmly believe that to be effective, the statutory
framework governing institutions of higher education should
apply even-handedly to all schools that participate in the
title IV loan program. Rising student debt and defaults affect
every sector of higher education and are not necessarily the
result of an institution's tax status.
Excessive student debt places a significant burden not just
on the student, but on our country as well, as approximately
$100 billion of student loans are currently in default. The
existing statutory framework does not, in my judgment, create
the appropriate incentives for those who are best positioned to
prevent and reduce such student loan defaults, the colleges and
universities which originate the loans. Instead, when a student
defaults, the educational institution retains the money it
received as tuition, while the taxpayers and the student are
left to pay the price.
Under current law, the primary debt-related measure
governing colleges and universities is the cohort default rate.
It is a blunt instrument, as my colleague has mentioned and
Senator Alexander as well, that eliminates access to title IV
funds only when a school reaches a 30 percent default rate for
an extended period of time, and even then an excessively high
default rate only cuts off future funds and does nothing to
require the school to repay any of the title IV money it has
already received.
There are several steps which I believe Congress can take
to correct this misalignment of incentives which arise from the
current system. These include, first, grant universities the
flexibility to delay disbursement of title IV funds until later
in an academic term, after it is clear that a student is
succeeding academically. Several speakers have already
mentioned the fact that the primary indicator of a student
successfully paying off their debt is student completion.
Second, for those universities whose cohort default rates
are worse than the national average of similar institutions,
limit the award of title IV funds to such universities to no
more than they received in the prior year. Let's not compound
the problem and make the situation worse by continuing to fund
institutions that are below the average.
Third, implement a method in which educational institutions
share in the financial risk of defaults on student loans which
are used to pay tuition to those institutions. As we've heard,
Senator Reed, Senator Durbin and Senator Warren have proposed
legislation that would create such a system. While the details
of their proposal should be subject to the debate and
negotiation and compromise necessary to create effective
legislation, I personally believe their bill is a good start.
And finally, any legislative proposal that requires
colleges and universities to share in the financial risk of
student defaults should allow those institutions to limit
student borrowing. Students may currently borrow, regardless of
necessity, roughly double the cost of tuition, fees, and books
through cost-of-attendance loans. As such, the system permits,
and indeed encourages, over-borrowing and taking on debt that
is not directly tied to an education.
Universities should be permitted to set borrowing limits at
their tuition costs only. Likewise, a risk-sharing system
should allow originating institutions to consider and evaluate
a student's individual default risk at the time of enrollment
and financial aid application, as long as that is based on an
academic preparation, which seems to be a very direct indicator
of success.
Legislation should permit and encourage academic
institutions to implement commonsense measures to increase the
likelihood that students successfully complete their studies
and that students do not take on more debt than they ultimately
will be able to repay.
Thank you, Mr. Chairman, for your leadership on this
important issue, and I look forward to continue working with
your committee. I have submitted a more detailed written
statement which I would ask to be entered into the record and
would be pleased to answer any questions at the appropriate
time.
[The prepared statement of Mr. Silberman follows:]
Prepared Statement of Robert S. Silberman, B.A., M.A.
executive summary
Strayer University, a 123-year-old university accredited by the
Middle States Commission on Higher Education, currently educates 41,000
adult students, primarily in bachelor and master degree programs in
business and information technology. Strayer University agrees that
Congress should improve the framework that governs taxpayer money
disbursed under Title IV of the Higher Education Act.
There should be a unitary system of regulation that applies to all
institutions that receive title IV loans as tuition. Non-profit
institutions, such as Southern New Hampshire University, and Arizona
State University, are increasingly marketing their online programs--not
to better serve their existing students but rather to grow their
enrollment of ``non-traditional'' working adult students. Thus, any
risk associated with high enrollment-growth models is no longer unique
to one segment of higher education. An effective framework for
regulatory oversight should not include or exclude institutions on the
basis of their source of funding. In addition, we recommend the
following concrete steps for reform:
1. Allow institutions to consider default risk in enrollment and
financial aid grants. Legislation should permit, and indeed encourage,
institutions to implement common sense measures to increase the
likelihood that students can successfully complete their studies and
will not take on debt that they ultimately will be unable to repay.
2. Grant institutions greater flexibility to delay disbursements.
The current CDR regulation requires institutions with a CDR at 15
percent or greater to delay disbursements for 30 days to first-year,
first-time subsidized and unsubsidized Direct Loan borrowers.
Legislation should expand on this, to allow institutions to delay
disbursements until a student demonstrates ability to succeed in a
program.
3. Allow institutions to set different costs of attendance for
students. The current system allows the possibility that students will
over-borrow, by allowing them to take financial aid for more than just
the cost of an educational program. Institutions should be permitted to
set borrowing limits for non-residential students at institutional
costs only.
4. Limit growth of institutions that have high cohort default
rates. Legislation could limit the amount of title IV funds awarded to
an institution with a CDR equal to or greater than the national average
of its peer institutions, (based upon the risk profile of the students
served) to no more than the amount awarded to the institution in the
previous year.
5. Impose Risk-Sharing Payments on Institutions. Finally, a viable
risk-sharing proposal could build off of the sanctions imposed for high
CDRs, but hold institutions accountable prior to reaching the 30
percent ineligibility threshold. One option is to require that any
institution, regardless of its funding source, remit a risk-sharing
payment when its CDR hits 15 percent. Thus, if the alumni of an
educational institution default on more than $0.15 for every $1.00
borrowed, then the institution should share equally with taxpayers the
cost of those defaults above the $0.15. This risk-sharing mechanism
(sometimes referred to colloquially as ``skin in the game'') will help
correct the current misalignment of incentives between educational
institutions and the Federal Government, and avoid the wealth transfer
from the taxpayer to the educational institution, which occurs in the
case of excessive student defaults.
______
Chairman Alexander, Ranking Member Murray, and committee members:
Thank you for the opportunity to comment on ways to create a more
effective system of higher education oversight and accountability, and
for your leadership on this important issue.
Strayer University is a 123-year-old university that is accredited
by the Middle States Commission on Higher Education, the same regional
body that accredits Princeton, Georgetown, the University of Maryland,
and the other outstanding schools in the Mid-Atlantic States. We
currently educate 41,000 adult students, primarily in bachelor and
master degree programs in business and information technology. Our
countless successful graduates include Retired Assistant Commandant of
the Marine Corps, General Robert Magnus, who received his MBA in 1998,
Hon. Kathryn Medina, who received her Bachelor of Business
Administration in 2004 and recently stepped down as an Executive
Director at the U.S. Office of Personnel Management, and numerous
senior business executives in all industries.
Strayer University agrees that Congress can and should improve the
framework that governs taxpayer money disbursed under Title IV of the
Higher Education Act (``HEA''). We outline below some suggestions for a
comprehensive legislative proposal aimed at (1) giving institutions the
flexibility to mitigate the risk of student loan defaults and (2)
imposing upon institutions that fail to sufficiently mitigate defaults
certain growth limitations and risk-sharing obligations.
In order to meet the goal of a better prepared workforce, our
Nation needs a diversity of institutions that serve both traditional
college students, and older working adults that did not have the
opportunity to benefit from a higher education directly after
graduating from high school. The country benefits from a system that
offers students a wide array of educational options that can meet their
varied needs. As such, the goal of any legislative proposal should not
be arbitrary standards aimed at one sector of higher education, but
targeted measures designed to protect students and taxpayers by
incentivizing sound educational practices and eliminating entities
providing a sub-par education.
We believe any legislative proposal should establish a simple,
unitary, system of regulation that applies to all institutions that
receive title IV loans as tuition. The problem of excessive student
debt affects every sector of higher education and is not a result of an
institution's tax status. Some commenters on the current student debt
crisis have suggested that for-profit institutions are uniquely
incentivized toward rapid enrollment growth, which in turn leads to
high rates of default. However, more and more ``traditional'' non-
profit institutions, such as the University of Maryland University
College, Southern New Hampshire University, and Arizona State
University, are taking their programs online--and marketing them
aggressively--not to better serve their existing students but rather to
grow their enrollments by competing for the growing population of
``non-traditional'' working adult students. They are undertaking these
programs either by working with private sector online service providers
(many of whom are themselves profit-seeking), or by building the
capacity in-house. As such, any risk associated with high enrollment-
growth models can no longer be argued to be unique to one segment of
higher education. Therefore an effective framework for regulatory
oversight should not include or exclude institutions on the basis of
their source of funding.
Congress has addressed the public policy issue of unmanageable
student debt, and the resulting taxpayer risk from student loan
defaults, through the provisions of the HEA that relate to an
institution's Cohort Default Rate (``CDR''). In 2008, Congress revamped
the CDR, in order to cure perceived inadequacies, and expanded the
measurement window from 2 years to 3.
Under the current legislatively approved CDR framework, Congress
has identified CDRs of 30 percent or higher as problematic, by
instituting a tiered system of consequences:
If the rate is equal to or greater than 30 percent in a
given fiscal year, the institution must establish a ``default
prevention task force'' and submit to the Department a default
improvement plan (``Plan'').
If the rate is equal to or greater than 30 percent for 2
consecutive years, the institution must revise and resubmit the Plan.
If the rate is equal to or greater than 30 percent for 2
out of 3 consecutive years, the Department may subject the institution
to provisional certification.
If the rate is equal to or greater than 30 percent for 3
consecutive years, the institution becomes ineligible to participate in
the Direct Loan program and Federal Pell Grant Program.
In addition, if an institution's CDR equals or exceeds 15 percent,
the institution must delay for 30 days disbursements to first-year,
first-time subsidized and unsubsidized Direct Loan borrowers.
More can be done to hold institutions accountable. But recent
attempts to revisit the issue of student debt and to accomplish the
goal of accountability have focused on regulatory changes that develop
new metrics, applied only to certain institutions, absent congressional
input. Instead, Congress should work off of the framework for
calculating CDRs to establish accountability.
recommendations
Congress should build on its existing legislative and regulatory
framework in two ways: first, by giving educational institutions more
authority to mitigate the risk of student defaults; and second, by
requiring those educational institutions to share the financial risk in
those circumstances where student defaults reach unacceptable levels. I
outline below concrete steps to effectuate these reforms:
(1) Allow institutions to consider default risk in enrollment and
financial aid grants. Any legislative effort seeking to hold
institutions accountable for student loan defaults must not hamstring
institutions from implementing their own safeguards against such
defaults. Legislation should permit, and indeed encourage, institutions
to implement common sense measures to increase the likelihood that
students can successfully complete their studies and will not take on
debt that they ultimately will be unable to repay. For instance, based
upon our years of operation in the sector and our own internal
research, analysis and experience, we have learned that students
lacking in basic math and English skills are exponentially more likely
to drop or fail out of undergraduate programs and therefore pose
undergraduate student loans default risks. Indeed, Strayer University
is so confident of this conclusion that we have established a
requirement that students who cannot demonstrate proficiency in basic
math and English skills must pass a non-credit bearing introductory
course in those subjects before they can enroll in college-level, title
IV-eligible course work at our institution. Simply put, inadequate
preparation is the root cause of students being unable to meet their
educational goals and thus these students are the most likely to
default on their student loans. Numerous examples of basic aptitude
tests already exist and can be utilized by institutions to establish a
prospective student's preparation for course work. Congress may
therefore consider establishing or recognizing a national eligibility
test for institutions to determine that students have the basic skills
to perform college-level work, particularly math and English skills,
before allowing title IV funds to be lent to the student. Such a test
would help ensure that title IV funds are only used to support students
having the requisite basic skills to succeed at college-level work.
(2) Grant institutions greater flexibility to delay disbursements.
The current CDR regulation requires institutions with a CDR at 15
percent or greater to delay disbursements for 30 days to first-year,
first-time subsidized and unsubsidized Direct Loan borrowers.
Legislation should expand on this, to allow institutions to determine
other instances in which it is advisable to delay disbursements until a
student can establish that he or she has the ability to succeed in a
program.
(3) Allow institutions to set different costs of attendance for
students. The current system allows the possibility that students will
over-borrow, by allowing them to take financial aid for more than just
the cost of an educational program. Under the financial aid system, a
student's aid package can include borrowing for the cost-of-living.
Although such borrowing may make practical sense for traditional
students who enter college at the age of 18 and are away from home, it
does not always translate to the population of older students returning
to school later in life who are already working adults. As such, the
system permits, and indeed in some instances encourages, over-borrowing
and taking on debt that is not directly tied to an education.
Institutions should therefore be permitted to set borrowing limits at
institutional costs only, which would grant access to title IV funds
for non-residential students for tuition expenses only.
(4) Limit growth of institutions that have high cohort default
rates. Recent regulatory measures have recognized that institutions
should be required to seek approval prior to expanding their programs
or campuses if they have not met certain standards. While this is
laudable, growth restrictions could be stronger and should be
reasonably tied to the congressionally created framework, not separate
independently created metrics. For instance, legislation could limit
the amount of title IV funds awarded to an institution with a CDR equal
to or greater than the national average of its peer institutions,
(based upon the risk profile of the students served) to no more than
the amount awarded to the institution in the previous year.
Notably, we recommend basing this growth limitation on a national
average CDR rather than on a pre-determined threshold to account for
many of the criticisms currently made against the existing CDR
framework. Critics of that framework contend that it does not properly
take into account economic factors that can, for a period of time,
affect repayment rates without having any bearing on the level of
education provided by an institution. Institutions should be held
accountable to students and taxpayers for the value of the instruction
they provide. But institutions should not be required to meet a
potentially arbitrary benchmark when economic conditions are such that
unemployment is high and wages stagnant or in decline. Basing the
limitation on a national average adjusts for these situations that are
beyond an institution's control. Moreover, using a national average
also inhibits the ability of institutions to manipulate their CDRs by
managing defaults based on a static target for compliance.
(5) Impose Risk-Sharing Payments on Institutions. Finally, a viable
risk-sharing proposal could build off of the sanctions imposed for high
CDRs, but hold institutions accountable prior to reaching the 30
percent or higher threshold at which the potential for ineligibility is
triggered. One option would be a requirement that any institution,
regardless of its funding source, remit a risk-sharing payment when its
CDR hits 15 percent. But while the CDR is based on the percentage of
student borrowers who have defaulted, irrespective of the amount on
which they have defaulted, the risk-sharing payment should be based on
a percentage of the actual dollar figures in default. As such, once it
is determined that an institution has a borrower-based CDR equal to or
greater than 15 percent, the Department should compute the percentage
of actual dollars defaulted based on the total amount of dollars
disbursed by the institution in that year. If more than 15 percent of
the total dollars disbursed are in default, institutions should be
required to remit a risk-sharing payment equal to 50 percent of the
total defaulted dollars above the 15 percent threshold, i.e., a true
risk-share between taxpayers and institutions.
Illustration:
Institution has a 15 percent borrower-based CDR, and
disbursed $500,000,000 to students in the cohort.
Students in the cohort defaulted on a total of
$100,000,000, or 20 percent of total dollars disbursed.
The risk-sharing payment is based on the difference
between $100,000,000 (20 percent) and $75,000,000 (15 percent) =
$25,000,000.
The institution's 50 percent of the risk equals a payment
of $12,500,000 to the Treasury.
The simple theory here is that if the alumni of an educational
institution default on more than $0.15 for every $1.00 borrowed, then
the institution should share equally with taxpayers the cost of those
defaults above the $0.15. This risk-sharing mechanism (sometimes
referred to colloquially as ``skin in the game'') will help correct the
current misalignment of incentives between educational institutions and
the Federal Government, and avoid the wealth transfer from the taxpayer
to the educational institution, which occurs in the case of excessive
student defaults. In order to protect taxpayers, all funds collected
from risk-sharing payments should be used exclusively to off-set
defaults in the title IV program, rather than to create funding for any
other governmental expenditure.
Thank you for the opportunity to share with you these thoughts on
how to establish a higher education accountability system that is both
effective and fair. We believe the actual numerical triggers and
percentages of students loan defaults subject to any risk sharing
should be subject to debate and compromise in order to create the most
effective system. However, the principles behind any equitable and
effective system are fairly straightforward. All parties who share in
the gains from the student loan system should share in any losses the
system creates. Strayer takes seriously both our responsibility to
provide our students with a quality education and our duty to be good
stewards of taxpayer money. I look forward to working with you to
ensure fulfillment of both these goals.
The Chairman. Thanks, Mr. Silberman.
Ms. Wang.
STATEMENT OF JENNIFER WANG, POLICY DIRECTOR, YOUNG INVINCIBLES,
WASHINGTON, DC
Ms. Wang. Thank you, Chairman Alexander, Ranking Member
Murray, and the committee, for the opportunity to appear before
you today. My name is Jennifer Wang, and I'm the policy
director of Young Invincibles. We are a national non-profit
that works to expand economic opportunity for young people
through research and advocacy.
As this committee works to reauthorize the Higher Education
Act, it's critical that young adult voices get heard throughout
the process. With $1.2 trillion in student debt and over 40
million student loan borrowers nationwide, Congress can use HEA
reauthorization as an opportunity to protect the investments of
students and taxpayers.
At Young Invincibles, we support aligning and improving
Federal incentives to elevate institutions' interests in
reducing the burden of student debt and improving access and
success, especially among low-income and underrepresented
students. Right now, the system is set up so that students bear
all of the risk of a poorly performing institution, with little
information available to them about career outcomes.
Our generation knows we need higher education to be
successful, and we stand ready to take on responsibility for
our education. However, institutions must also take
responsibility for student success. To improve educational
outcomes and control the growing volume of student debt,
Congress must align institutional behavior with student
interests.
We recommend adopting the following goals to protect
students and taxpayers.
First, require that institutions be on the hook for student
success such that institutions that do not leave their students
better off than high school graduates must improve or risk
title IV eligibility.
Second, craft a policy that encourages institutions to
lower the cost of attendance.
And third, in the worst instances, require institutions to
provide borrowing relief.
I must point out, risk-sharing cannot be a substitute for
existing protections like the 90/10 rule or the gainful
employment rule. These protections prevent the most
unscrupulous actors from taking advantage of students. We also
believe that institutions must not threaten to pass the so-
called cost of risk-sharing on to its students.
We have crafted a proposal that uses a repayment rate of at
least 45 percent based on earnings of high school graduates.
Our analysis of 2013 current population survey data estimates
that roughly 46 percent of young adults with a high school
diploma could possibly afford some level of student debt
payments. We set this threshold because higher education should
leave young people with more opportunities for employment than
if they tried to navigate the job market with just a high
school degree. Institutions that cannot meet this threshold
should not remain eligible for title IV aid.
Under our proposal, 45 percent of graduates must be able to
pay at least $1 on their loans toward principal. Simply
assessing whether graduates are in repayment may not be
sufficient because we believe that repayment protections exist
for the borrower, not the institution.
This committee should keep in mind also that students make
sacrifices to attend college that are not limited to tuition,
cost of attendance, and debt. Therefore, we urge the committee
to craft a policy that encourages completion in a reasonable
amount of time with a degree that helps students succeed in the
workforce and does not saddle students with overly burdensome
debt.
It is important that the committee build some form of
borrower relief into any risk-sharing proposal because it is
currently the student loan borrower who is ultimately held
accountable for a school's failure. As it stands, we do not
have a market-oriented system for mitigating risk, and without
borrower relief, institutions have little to no financial stake
in student success. Losing title IV eligibility is a check on
revenue for institutions, but it does nothing to help borrowers
who attend failing programs already burdened with debt they
cannot possibly afford to repay.
A preferred solution in the worst scenarios is to discharge
the debt of students who attend failing institutions, reinstate
any lost Pell Grant eligibility, and recover as much lost
funding as possible from the institution, not the student.
We also urge the committee to explore risk-sharing policies
that will incentivize institutions to improve rather than
simply avoid enforcement.
I want to close on a student story. Mike DiGiacomo, a U.S.
Army veteran who went to Gibbs College in Massachusetts,
enrolled after the school used questionable recruitment
practices. He now has more than $85,000 in student loan debt.
He thought his degree would help him find a job in his field of
study. He says his school did not adequately prepare him for
the workforce. He has faced several months of unemployment, and
he struggles to repay his student loans. We urge the committee
to prevent these types of situations.
Thank you for the opportunity to speak here today, and I
look forward to the discussion.
[The prepared statement of Ms. Wang follows:]
Prepared Statement of Jennifer C. Wang
summary
Young Invincibles supports the goal of aligning and improving
Federal incentives to elevate institutions' interests in reducing the
burden of student debt and improving student access and success,
particularly among low-income and underrepresented students. To improve
postsecondary outcomes and control the growing volume of student debt,
Congress must align institutional behavior with student interests.
We recommend the following main goals for creating a risk-sharing
framework to protect students and taxpayers:
1. Institute a repayment rate metric to ensure that institutions
leave their students better off than high school graduates or risk
title IV eligibility.
2. Craft a policy that encourages institutions to lower cost of
attendance and tighten revenue standards.
3. Require institutions to provide borrower relief.
We also urge the committee to keep the following flags in mind:
Risk-sharing must not be a substitute for existing
protections, like the 90/10 rule or the Gainful Employment rule. These
rules exist to prevent the most unscrupulous actors from taking
advantage of students, and in fact, should be strengthened in the face
of widespread bad practices. Closing the GI bill loophole and
establishing an 85/15 rule are essential pieces of any risk-sharing
regime to ensure program quality and protect students and taxpayers.
Institutions must not threaten to pass the so-called
``cost'' of risk-sharing onto students. It is the role of this
committee to ensure that institutions do the right thing by
strengthening existing regulations while preventing institutions from
evading rules meant to protect students.
Risk-sharing policies should incentivize institutions to
improve, rather than simply avoid enforcement. Ideas for promoting
institutional improvement include rewarding institutions that do the
best job of educating students, particularly Pell students and students
from underrepresented communities, and connecting them with real career
opportunities. Along these lines, institutions with high repayment
rates deserve credit for doing a good job, and we encourage the
committee to explore well-targeted methods of encouraging institutions
to do better, starting with the students who need it most.
______
Thank you, Chairman Alexander, Ranking Member Murray, and the
committee for the opportunity to appear before you today. My name is
Jennifer Wang, and I am the policy director of Young Invincibles, a
non-profit, non-partisan organization that works to expand economic
opportunity for young adults. As this committee seeks to reauthorize
the Higher Education Act, it is essential that the voices of young
adults be heard throughout the process. With $1.2 trillion in student
debt and over 40 million student loan borrowers nationwide, Congress
must use Higher Education Act reauthorization as an opportunity to
protect the investments of students and taxpayers.
Young Invincibles supports the goal of aligning and improving
Federal incentives to elevate institutions' interests in reducing the
burden of student debt and improving student access and success,
particularly among low-income and underrepresented students. In our
work directly with young people, we frequently hear from students
across the country about how lofty promises from the worst acting
institutions turn into mountains of debt with few job prospects in
sight. Right now, the system is set up so that students bear all of the
risk of a poorly performing institution, with little information
available to them about career outcomes. Our generation knows we need
higher education to be successful, and we stand ready to take on
responsibility for our education. However, institutions must also take
responsibility for student success. To improve postsecondary outcomes
and control the growing volume of student debt, Congress must align
institutional behavior with student interests.
We recommend the following main goals for creating a risk-sharing
framework to protect students and taxpayers:
1. Institute a repayment rate metric to ensure that institutions
leave their students better off than high school graduates or risk
title IV eligibility.
2. Craft a policy that encourages institutions to lower cost of
attendance and tighten revenue standards.
3. Require institutions to provide borrower relief.
To be clear, we believe that risk-sharing must not be a substitute
for existing protections, like the 90/10 rule or the Gainful Employment
rule. These rules exist to prevent the most unscrupulous actors from
taking advantage of students. We also believe that institutions must
not threaten to pass the so-called ``cost'' of risk-sharing onto
students. It is the role of this committee to ensure that institutions
do the right thing by strengthening and existing regulations while
preventing institutions from evading rules meant to protect students.
1. Institute a repayment rate metric to ensure that institutions leave
their students better off than high school graduates or risk title IV
eligibility.
Under the Higher Education Act, institutions already have a skin in
the game requirement for a narrow subset of programs. However, this
committee should broaden institutional accountability to all program
types at all institutions, so that all schools are on the hook for
producing strong student outcomes. Our recommendation is based on the
following concept: in order to receive Federal financial aid,
institutions should create education programs that make their
graduates, on average, better off than high school students. Students
attend post-secondary programs in order to improve their economic
chances. Taxpayers also invest in post-secondary career programs, in
part, to achieve the economic gains everyone benefits from when more
members of society have a postsecondary credential. To achieve this, we
recommend using a repayment rate metric of at least 45 percent, with
the goal of phasing in a 50 percent standard.
We suggest using a repayment rate metric because we believe that
they are a better indicator of student success upon leaving a program
than cohort default rates. They are less subject to manipulation
because borrowers who leave school must actually repay student debt,
rather than simply avoid default using forbearance or deferment.
Repayment rates also more closely measure success than default rates,
which only measure the frequency of the worst possible repayment
outcomes.
We crafted our 45 percent repayment rate metric using census data
to estimate the economic success of an institution's graduates compared
to high school graduates nationally in the context of repayment rates.
People with only a high school diploma earn significantly less than
individuals with a post-secondary credential. This does not imply that
no one with only a high school diploma ever achieves financial success,
but it does indicate that the chance of doing so with only a high
school diploma is sufficiently small that obtaining a postsecondary
credential is highly advisable.
We based our calculation on the discretionary income thresholds
present in the current debt-to-earnings metrics and those set by
Congress for income-based repayment plans. Essentially, Congress has
already based policy around the idea that individuals earning less than
1.5 times the Federal poverty level cannot afford even minimal payments
on Federal student loans. Conversely, we assume for the purposes of our
calculation, that individuals earning more than this amount could at
least make some student loan payment. From this baseline, we further
eliminated people qualifying for social safety net benefits or who are
active in the armed forces.
We also constrained our analysis to young adults aged 25-34 years
old because older workers typically earn much higher salaries due to
their previous work experience. Although we know that some institutions
typically enroll many students who do not come straight from high
school, we know that many of these students are still in their young
adult years. We also feel it is appropriate to compare college
graduates to a population of high school graduates near to when those
graduates actually left high school.
Our analysis of 2013 Current Population Survey (CPS) data estimates
that 46.2 percent of young adults with a high school diploma could
possibly afford some level of student debt payments. We would recommend
initially reducing the threshold to 45 percent, to account for
additional populations of borrowers we cannot account for due to
limitations in CPS data (e.g., borrowers engaged in national service
may defer their payments). However, we urge the committee to explore
phasing the rate up to 50 percent in later years, as Senator
Alexander's white paper suggests.
We note that this is a low bar but one with economic support. We
are also certain that many of the high school graduates earning more
than 150 percent of the Federal poverty would struggle with debt
payments, particularly if they had high levels of student debt. For
comparison, doing the same analysis for bachelor's level graduates
would produce a repayment rate of greater than 70 percent. However, we
do not seek to set an unreasonable standard for institutions,
particularly institutions with high populations of non-traditional
students, or institutions where the vast majority of students do not
borrow.
In addition to encouraging institutional accountability using a
repayment rate, we suggest that the committee use the following rule
when assessing whether an institution passes: that 45 (and eventually
50 percent) of their graduates are able to pay at least $1 on their
loans toward principal. Simply assessing whether 45 or 50 percent of
graduates are in repayment may not be sufficient because at
institutions where students take on substantial debt, some may have
very low payments or payments of zero under income-based or income-
contingent repayment. We believe that IBR should be a protection for
the borrower, not the institution.
For example, if a school performs poorly, many of its borrowers
could end up making very low payments or no payments and receiving high
levels of student loan forgiveness under IBR or PAYE. This would mean
that the Federal Government would be covering for an institution's poor
performance in these instances. Giving an institution credit for any
type of payment, low or zero, masks that they are leaving borrowers
with a lot of debt that they can never repay. As such, requiring that
borrowers pay at least some principal in a given year ensures that
borrowers are actually learning and earning enough to make progress on
their debt.
We also encourage this committee to exclude failing institutions
from title IV aid using a repayment rate metric. The structure of our
repayment metric sets a minimum standard for school performance for
receiving Federal financial aid. We believe a post-secondary
institution that receives title IV aid must perform better, on average,
than the average secondary school. There is no reason that taxpayers
and the government should continue to support institutions that fails
to produce graduates that are no better than those with a high school
diploma. We also encourage this committee to explore risk-sharing ideas
that encourage institutions to improve.
Along with a repayment rate metric, we also recommend lifting the
ban on a student unit record to allow for a policy to account for a
diverse set of job outcomes. Under current law, the Census and its
response data would not be able to answer labor outcomes by
institution, or even sector. For a fully functional risk-sharing system
that is useful to students and taxpayers, Congress must lift the ban on
a unit record system to examine these outcomes. This way, the committee
could build in questions about school type, and program type into the
data. This is vital information that we know students say they need in
order to make informed choices about where to go to school and how to
pay for it.
2. Craft a policy that encourages institutions to lower cost of
attendance and tighten revenue standards.
The costs of a college degree are rising, but that trend overlooks
opportunity costs when assessing how much a degree actually costs. The
opportunity costs of going to college are great, and go beyond what a
student pays in tuition, fees, and living expenses. The average full-
time college student forgoes over $9000 in earnings for each year she
spends in school. That number increases to nearly $16,000 for students
in college who do not or cannot work while enrolled. Most students
today also do not graduate from college in 4 years and can forego over
$93,000 in income. Combine this figure with how much debt the average
college graduate now has due to rising college costs, and the need for
risk-sharing becomes even more necessary for today's student, who is
sacrificing both time and money to pursue an education.
Tuition alone is also no longer an accurate measure of the rising
cost of college. Living expenses are essential expenses for students,
and the economic reality for most students is that they must take on
additional student loan debt to pay for living expenses in order to
attend and complete college. This is particularly true at certain
institutions that serve larger proportions of low-income, independent
students, who cannot rely on savings or family support. A risk-sharing
framework must take this necessary borrowing into account in addition
to opportunity cost, and factor in the full cost of attendance into
account when crafting a risk-sharing framework.
In our work with students, we have also heard that some
institutions require that students purchase expensive products from the
institution in order to enroll in a course. This behavior can
significantly increase the amount of debt that students who attend
these programs incur. To ensure institutions are held accountable for
the additional debt, we strongly recommend that Congress keep
institutions fully accountable to the realities of being a student
today: by including books, supplies, and equipment in any risk-sharing
calculation for cost of attendance. We hope that this will prevent
institutions from passing on the ``costs'' of risk-sharing onto
students in ways other than raising tuition.
Ideally, any risk-sharing proposal would take into account the full
cost of attendance and keep institutions accountable to students for
this amount. We urge the committee to craft a proposal that
incorporates this idea into its framework. This committee should also
keep in mind that the sacrifices that students make to attend college
are not limited to tuition, cost of attendance, and debt. Therefore, we
encourage this committee to craft a policy that encourages completion
in a reasonable amount of time, with a degree that helps students
succeed in the workforce, that does not saddle students with overly
burdensome debt.
We also urge the committee to explore market-based policies that
help curb unscrupulous practices that raise costs for students or
encourage aggressive marketing. One idea is to restore the 90/10 rule
to 85/15, such that institutions subject to this rule must derive at
least 15 percent of institutional revenue from non-Federal student aid
programs. This rule is appropriate in risk-sharing because taxpayers
should not foot the bill for well-known aggressive recruitment tactics
at institutions looking to derive more revenue from certain students,
like student veterans. Institutions that offer a quality education at a
reasonable price are well-respected by students, employers, and aid
providers, and should not have trouble meeting this standard.
Of course, Congress should explore other risk-sharing proposals
that can lower the total cost of attendance at all types of
institutions and programs. We believe that every type of institution,
regardless of its tax status, must play a proactive role in addressing
cost of attendance, and urge Congress to financially encourage such
behavior. In addition to narrowing generous cost of attendance
policies, Congress could also encourage institutions to refocus funds
toward instruction and keep institutions on the hook for extraneous
student debt not related to instruction. These are commonsense, market-
oriented reforms designed to encourage institutions to adapt to reflect
the realities of being a student today.
3. Require institutions to provide borrower relief.
Risk-sharing cannot exist without some form of borrower relief
because it is currently the student loan borrower who is ultimately
held accountable for an institution or program's failure. As it stands,
we do not have a market-oriented system for mitigating risk, and
without borrower relief, institutions have little to no financial stake
in student success. Accountability in the form of loss of title IV
eligibility is a check on revenue for institutions, but it does nothing
to borrowers who attended failing programs, already burdened with debt
they cannot possibly afford to repay. Institutions cannot continue to
receive all of the benefit in Federal financial aid revenue should a
program succeed, while borrowers and taxpayers bear the burden should
the program fail.
Congress owes these students who attend failing institutions and
programs some form of insurance. Requiring schools to fund borrower
relief ensures that schools must take into account the risk to students
when creating programs. Our preferred solution in the worst scenarios
is to discharge the debt of students who attend failing schools,
reinstate any lost Pell grant eligibility, and recover as much lost
funding as possible from the institution, not the student.
This is the fairest resolution for four reasons. First, because it
is the student who took on loans for an education in what we know is a
low-information environment, Congress must also ensure that students
are not harmed by the financial distress resulting from when programs
are less than ideal. Second, a full loan discharge would allow students
the option to pursue an education that actually makes a difference in
their lives rather than struggle to repay debt for a program that does
not adequately prepare them to start a career and repay their debt.
Third, the institution is ultimately responsible for the failed
program, and should compensate taxpayers for as much of the lost
investment as possible. Fourth, Congress must reinstate Pell
eligibility for students who institutions are deemed as failing. This
is critical to maintaining college access. It is fundamentally unfair
to disqualify hardworking low-and moderate-income students who do the
right thing by attending college only to receive little education and
few job prospects. In the worst cases, students could be lured into bad
programs, use up their Pell dollars attending poorly performing
programs, and have no second chance at success. Reinstating Pell
eligibility would give students a fair opportunity to work hard,
complete a degree, and start a career.
We also urge the committee to explore risk-sharing policies that
will incentivize institutions to improve, rather than simply avoid
enforcement. Ideas for promoting institutional improvement include
rewarding institutions that do the best job of educating students,
particularly Pell students and students from underrepresented
communities, and connecting them with real career opportunities. Along
these lines, institutions with high repayment rates deserve credit for
doing a good job, and we encourage the committee to explore well-
targeted methods of encouraging institutions to do better, starting
with the students who need it most.
As with any other postsecondary education reform, we urge the
committee to prioritize student access and success over all else.
Reforms must not impede access or place the needs of institutions over
students and families. Thank you for the opportunity to speak here
today, and I look forward to the discussion.
The Chairman. Thank you, Ms. Wang.
Dr. Webber.
STATEMENT OF DOUGLAS A. WEBBER, B.A., M.A., Ph.D., ASSISTANT
PROFESSOR, TEMPLE UNIVERSITY, PHILADELPHIA, PA
Dr. Webber. Chairman Alexander, Ranking Senator Murray, and
distinguished members of the committee, thank you very much for
having me to this important hearing. As a researcher who
strives to do relevant policy research in the area of higher
education, it is truly an honor to be here today. Thank you
very much to Senator Casey for that generous introduction.
For reasons relating to fairness, efficiency, and economic
incentives, I am in favor of all institutions participating in
Federal student aid programs being subject to risk-sharing
requirements. Similar to the proposal of Senator Reed, I'm in
favor of imposing a penalty on institutions equal to a
proportion of the student loan debt that is defaulted upon by
prior students.
However, I believe that this penalty should be paid by all
institutions rather than just those above a certain threshold.
The simple reason is that we want to target the penalty at
those institutions that are most contributing to our current
national student debt crisis. These are not necessarily the
institutions with the highest cohort default rates.
For instance, certain segments of the community college
sector have very high default rates, but since the tuition at
these schools is generally low, their contribution to the
national student debt is smaller than would be imagined.
Additionally, just because an institution has a modest
overall default rate does not mean that there is not
substantial room for improvement. Consider a hypothetical
university with a major degree program in which students
default 50 percent of the time. This university should not
escape a penalty because the rest of the institution has a
lower default rate that brings the institutional average under
15 percent. All institutions in all of their offered programs
should be incentivized to consider the future debt levels and
labor market outcomes among their students. This means allowing
students to complete their program in a timely manner, without
incurring unsupportable debt levels, and teaching students
skills that are valuable in today's competitive labor market.
One potential concern related to implementing a risk-
sharing policy is that it could possibly put upward pressure on
tuition rates. I examined this issue in a recent research paper
which attempts to quantify the tuition response to risk-sharing
penalties should they be imposed. In this research I used
administrative data on each institution which receives title IV
funding over a 25-year period to essentially estimate features
of the cost structure for each institution and calculate from
their point of view a financially optimal tuition response to
the increased cost of risk-sharing. I estimated these both for
a 20 percent and a 50 percent risk-sharing penalty.
Throughout my research I tried to make assumptions about
institutions' behavior which would lead to the worst-case
outcome for students. I make these assumptions because I
believe that policymakers should be risk averse when
considering such substantial policy changes.
I find that the typical institution would implement only a
modest tuition increase of approximately 1 percent under the 20
percent risk-sharing penalty and 2 percent under the 50 percent
penalty. The only institutions which would implement
appreciably larger increases in tuition are those which have
high tuition, high rates of borrowing, and high default rates;
in other words, those institutions contributing the most to our
current student debt problem.
It is my judgment that these modest increases in tuition
are far outweighed by the powerful incentives they will provide
institutions to invest in their students' economic futures. I
want to reiterate that these figures assume worst-case scenario
and that the legislation has absolutely no impact on
incentivizing institutions to reduce defaults. Since
institutions are likely to devote more energy toward reducing
student debt as a result of this policy, I would anticipate
that the actual tuition increases would be even smaller.
Finally, I wanted to mention that coupling a risk-sharing
policy with the reforms discussed in other hearings, such as
easing the accreditation requirements and providing in
particular detailed consumer information at both the
institution and major degree program level, would also
alleviate upward pressure on tuitions resulting from a risk-
sharing policy.
To summarize my testimony, I am strongly in favor of
instituting a risk-sharing program which incentivizes all
institutions to invest more heavily and efficiently in labor
market outcomes of their students.
Thank you very much for having me here today.
[The prepared statement of Dr. Webber follows:]
Prepared Statement of Douglas A. Webber, B.A., M.A., Ph.D.
executive summary
This testimony discusses the issue of risk-sharing in the market
for student higher education loans. I focus my testimony on the appeal
of such a policy relative to the current system, a basic structure for
how a new accountability system could be implemented, and the costs/
benefits of this system based on my own research.
The appeal of a risk-sharing policy:
Student loan debt is a growing problem for both
students and the overall health of the national economy.
Risk-sharing incentivizes institutions to invest more
in their students' future economic well-being by requiring
institutions to bear some of the financial costs associated
with the defaulted loans.
Risk-sharing provides these incentives to all
institutions and students, rather than the few worst performing
institutions (as is currently the case).
The basic structure of the risk-sharing policy I support:
A financial penalty paid by institutions equal to a
fraction (e.g., 20 percent) of the value of defaulted student
loans by their past students.
More straightforward than the current system, without
the need for ad hoc adjustments.
Other implementations, such as an Unemployment
Insurance-type system are discussed.
Costs and benefits of risk-sharing policy:
Modest projected increases in tuition: 1 percent (2
percent) for most institutions under a 20 percent (50 percent)
risk-sharing penalty.
Only institutions which have high tuition, high rates
of student borrowing, and high default rates (i.e., those
institutions contributing the most to the growth in student
debt) would see higher increases (2.5 percent -4.5 percent).
The above figures assume there is no incentive effect
of risk-sharing by institutions. As the incentive effect
increases, the projected increase in tuition diminishes.
Unintended negative consequences of risk-sharing
(such as increased tuition) would be diminished when coupled
with many of the reforms discussed in the other hearings on the
reauthorization of the Higher Education Act (e.g., consumer
information and accreditation).
______
Chairman Alexander, Ranking Member Murray, and distinguished
members of the committee, thank you for inviting me to this important
hearing. As a researcher who strives to do policy relevant work in the
area of higher education, this is truly an honor.
My name is Doug Webber, and I am currently an assistant professor
in the Department of Economics at Temple University and a Research
Fellow at the Institute for the Study of Labor. My main areas of
research are the economics of higher education and labor economics. I
have Bachelor's degrees in Economics and Mathematics from the
University of Florida, and Masters and Ph.D. degrees from Cornell
University. During my last 2 years of graduate study, I also worked as
an Economist at the U.S. Census Bureau's Center for Economic Studies.
National student loan debt currently tops $1.3 trillion, the vast
majority of which is backed by the Federal Government. At a
macroeconomic level, student loan debt has been compared to the housing
bubble of last decade. At a microeconomic level, many individuals are
burdened by debt, which has been shown to negatively impact many
measures of well-being\1\ in addition to the clear strain on financial
security. It is thus in the best interest of students and the economy
as a whole for the committee to adopt the reforms discussed in the
various hearings on the reauthorization of the Higher Education Act.
---------------------------------------------------------------------------
\1\ Reduced financial security has been found to impact a wide
range of important decisions such as marriage, fertility, occupation,
and many others.
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My testimony today focuses on the economic motivation and social
appeal of a risk-sharing program, how it might be structured, and
possible implications for institutions and students based on my own
research.
While there are many factors which contribute to an individual
defaulting on his or her student loan debt, some proportion of the
fault must lie with the institutions that accept the loan-bearing
students. It is important to state that there need not to be fraudulent
intent or even poor teaching for institutions to be responsible for
some share of the blame. For example, students may be pushed into
certificate or major programs which are intellectually stimulating, but
have poor job prospects upon graduation, without being given adequate
information by their school.
Under the current system, if a student defaults, the institution
bears no responsibility in terms of repaying the loan. Thus, the
institutions reap the benefits of these loans, i.e., they are able to
extract revenues, but they pay none of the costs when the loan is not
repaid. Instead, the burden falls on the American tax payer.
Furthermore, the current incentive system, which restricts access to
Federal student aid if cohort default rates fall above certain
thresholds based on cohort default rates, effectively only applies to a
handful\2\ of schools with the highest default rates. Under this
system, the vast majority of schools have no direct financial stake in
their students' outcomes once students are no longer enrolled.
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\2\ See https://kelchenoneducation.wordpress.com/2014/09/24/
analyzing-the-new-cohort-default-rate-data/.
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In a well-functioning market, a ``skin in the game'' incentive
system would be less critical because market forces would drive out any
institutional bad actors and force the remaining schools to operate
efficiently and in their students' best interest. However, the market
for higher education is far from perfect, characterized by a
substantial lack of consumer information, a large growth in
administrative bureaucracy,\3\ and sometimes wasteful spending.\4\
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\3\ See http://necir.org/2014/02/06/new-analysis-shows-problematic-
boom-in-higher-ed-administrators/.
\4\ See http://www.nytimes.com/2014/09/21/fashion/college-
recreation-now-includes-pool-parties-and-river-rides.html?_r=0.
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how to structure a risk-sharing system
For reasons relating to fairness, efficiency, and economic
incentives, I am in favor of all universities which participate in
Federal student aid programs being subject to risk-sharing
requirements. While the majority of policy discussions tend to focus on
for-profit colleges, all institutions lack sufficient incentives to
address the issue of student loan defaults, and thus we should consider
all institutions in our policy response.
I believe this is the correct policy response in terms of
efficiency for two reasons: requiring all institutions to participate
(1) reduces government monitoring costs/time, and (2) reduces the
ability of institutions to escape risk-sharing costs by ``gaming'' the
system.\5\
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\5\ See https://www.insidehighered.com/news/2015/05/13/sec-charges-
itt-fraud-over-student-loan-programs for one such example.
---------------------------------------------------------------------------
As for economic incentives, the gains to society of preventing one
default are the same whether that default is prevented at a school with
a 25 percent default rate and 80 percent borrowing or an institution
with a 3 percent default rate and 5 percent borrowing. By requiring all
schools to be subject to risk-sharing, everyone will be incentivized to
reduce their students' default probabilities.
I support using the dollar-based cohort default rate\6\ both as the
metric and also as the key determinant of liability. For example, each
school might be required to pay a risk-sharing penalty equal to 20
percent of the value of the student loans which have gone into default
in the past year. The primary reason I support this approach is that it
sidesteps many of the problems we currently see plaguing the
accountability system using cohort default rates as the metric.
Considerable time and money has been spent trying to create a system
which makes schools accountable, but does not unfairly penalize schools
which happen to fall on the bad side of blunt metrics. For instance,
some schools with very small class sizes have exceeded the current
default rate standards simply by random chance.\7\ Moreover, a program
with 30 total students (10 defaulting) has an entirely different
implication for taxpayers' financial responsibility from a program with
30,000 students (8,000) defaulting). Between these two schools, clearly
the government should be more concerned about the latter, even though
the cohort default rate is lower (33.3 percent versus 26.6 percent).
---------------------------------------------------------------------------
\6\ While my research focuses on the use of cohort default rates,
other metrics such as the repayment rate may also be attractive to
policymakers. For example, the risk-sharing penalty could be 20 percent
of the value of student loans which are currently delinquent. If the
committee prefers this metric, I would stress that the penalty must be
smaller than the one they would prefer using cohort default rates to
avoid placing too much financial strain on institutions. Furthermore,
complications could arise when deciding how to handle accounts which
are delinquent (and thus cause a penalty to be paid), but then return
to good standing at a later date.
\7\ Small programs are more likely to occasionally surpass any
threshold which is based on a percentage based only on bad luck.
---------------------------------------------------------------------------
By basing the metric and penalties on the dollars defaulted, the
rules can be made more straightforward (and thus easier to identify and
enforce) without the need to create the numerous exceptions\8\ and
complicated rules under the current model.
---------------------------------------------------------------------------
\8\ See https://www.insidehighered.com/news/2014/09/24/education-
dept-tweaks-default-rate-calculation-help-colleges-avoid-penalties.
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I am strongly in favor of a monetary penalty (based on the dollars
defaulted) rather than restrictions on access to financial aid programs
or enrollment. Restricting Federal aid is a very blunt policy
instrument which is more likely to lead to unintended consequences
(e.g., lack of access for at-risk groups) than a monetary penalty tied
to the number of dollars defaulted upon. Furthermore, all-or-nothing
penalties are rarely the best policy option since they only incentivize
institutions near the threshold, and produce highly unequal punishments
for similar schools who happen to fall on different sides of the
cutoff.
research on risk-sharing
Opponents of risk-sharing proposals are correct to note that a
potential unintended consequence of the system I described is an
increase in tuition rates. This fear served as the motivation for
recent research I conducted examining the impact of a risk-sharing
program on institutional decisionmaking.
In my research,\9\ I analyze the impact of a hypothetical risk-
sharing program which imposes a penalty of 20 percent or 50 percent of
the dollars defaulted upon by previous students using administrative
data from the Integrated Postsecondary Data System (IPEDS). This was
accomplished in several steps: (1) I estimated cost functions\10\ for
institutions which receive title IV funding. Most importantly, I
estimated the cost to each institution of educating the last student,
known as the ``marginal cost'' in economics. (2) I assumed that each
institution would respond in a financially optimal way to the
imposition of risk-sharing penalties (in other words, institutions
would raise tuition so as to maximize profits). This step requires
knowledge of an institution's cost structure (estimated in the first
step) and the demand curve (specifically a quantity known in economics
as the ``demand elasticity'') faced by each institution. Rather than
estimate these demand curves using my data, which are not well-suited
for this type of analysis, I run my statistical analysis separately
using low, medium, and high estimates of the demand elasticity found in
the literature.\11\ (3) I calculated what the optimal tuition response
(i.e., how much institutions would increase their tuition) would be
when either a 20 percent or 50 percent risk sharing penalty were
imposed on schools.
---------------------------------------------------------------------------
\9\ See Webber (2015b).
\10\ This was accomplished using a panel data extension of the
method pioneered in Cohn, et al. (1989).
\11\ See Long (2004).
---------------------------------------------------------------------------
It is important to note that throughout my paper I try to make
assumptions which would lead to the worst-case scenario in terms of
tuition increases. I make these assumptions because I believe that
policymakers should be risk averse when making decisions which have
such broad impacts. For instance, I assume that students who default
have not repaid any of their loan balance. Furthermore, I begin by
assuming that institutions will do absolutely nothing to lower their
default rates, and thus there is no incentive effect of risk-sharing.
In this way, the results represent an upper bound in terms of negative
tuition consequences.
I find that for the vast majority of institutions, tuition
increases would be fairly modest. The predicted median increase in
tuition would be roughly 1 percent under a 20 percent risk-sharing
penalty, and 2 percent under a 50 percent risk-sharing penalty. Only
schools which satisfy all three of the following conditions appear to
be at risk for appreciably higher tuition increases: high default
rates, high tuition, and high rates of student borrowing. The median
tuition increase for these institutions would be closer to 2.5 percent
and 4.5 percent respectively under a 20 percent and 50 percent penalty.
The virtue of these results is that only the schools which are causing
the most harm would be appreciably impacted by a risk-sharing program.
Furthermore, these figures would certainly be lower if there is any
incentive effect associated with the penalties.
It should also be noted that there are numerous policies and
mechanisms through which individual schools could address student debt.
These include, but are not limited to, policies which impact
graduation, time to degree,\12\ internships, choice of major, or
teaching quality. Institutions would be free to determine which of
these avenues is most efficacious and cost-efficient given their
specific resources and needs.
---------------------------------------------------------------------------
\12\ For instance, Temple University President Neil Theobald
introduced an innovative program entitled ``Fly in Four'', which
provides grants to students in exchange for meeting regular progress to
degree benchmarks and a promise not to work more than 10 hours per week
during enrollment. http://chronicle.com/blogs/headcount/temple-u-
program-will-help-students-work-fewer-hours-graduate-on-time/37593.
---------------------------------------------------------------------------
Additionally, there are many potential reforms which have been
discussed in other hearings on the Higher Education Act that would
reduce or eliminate upward pressure on tuition when coupled with a
risk-sharing program. For example, a majority of Associate's Degree
programs require at least 65 or 66 credits to obtain a degree, two full
classes above the norm of 60. Many of these programs require more than
70 credits.\13\ This growth in required classes has been seen even in
general education programs, where it is difficult to argue that the
extra courses serve a crucial role in students' future careers.
Depending on the State and specific program, this could be due to
accreditation regulations or institution-level bureaucracy. Longer
programs increase the likelihood of student default both because of
larger student loans taken out and a lower probability of graduation.
Reforms which allow and encourage institutions to be more efficient in
producing graduates would simultaneously ease upward pressure on
tuition due to risk-sharing policies and reduce future student loan
defaults.
---------------------------------------------------------------------------
\13\ See Johnson, et al. (2012).
---------------------------------------------------------------------------
Another set of reforms which would prevent tuition increases
relates to the consumer information focus of the Higher Education Act
reauthorization. There are enormous differences in earnings across
different majors.\14\ For example, the median graduate with a degree in
economics earns roughly $1 million more over their lifetime\15\ than
the median college graduate with a management degree. There are many
students whose education does not pay off until very late in life or
ever.\16\ Yet students and parents, in particular more vulnerable
students and parents, often do not have the facts necessary to make
arguably the most important financial decisions in life: (1) which
school to attend and (2) what major to select. Providing labor market
and student loan outcomes, in an easy to understand format, at the
institution and program level would enable students to make informed
decisions and could drastically lower the number of future loan
defaults (and thus alleviate upward pressure on tuition from a risk-
sharing program).
---------------------------------------------------------------------------
\14\ See Webber (2014).
\15\ http://www.cla.temple.edu/economics/files/2014/04/Expected-
lifetime-earnings-All1-copy
.pdf.
\16\ See Webber (2015a).
---------------------------------------------------------------------------
The way in which a risk-sharing proposal is operationalized is
critical to its success. For example, it has been proposed that risk-
sharing could be implemented through a system akin to Unemployment
Insurance (UI) rather than the penalty structure described above. While
it is true that a perfectly designed insurance system could have the
same incentive effects as a penalty based on the number of dollars
defaulted upon, I caution against an insurance system for two reasons.
First, administrative cost and complexity should be minimized to make
risk-sharing as straightforward and efficient as possible; a UI-like
system might be counterproductive in this respect. Second, an insurance
system, almost by definition, leads to cross-subsidization. In this
case, schools with a small number of dollars defaulted would
effectively subsidize those schools with a high number of defaults.
There are positives and negatives to this sort of subsidization. On one
hand, it would dampen the incentive effect of risk-sharing at the
schools that are performing very well in terms of their default rates.
On the positive side, it could ensure that risk-sharing penalties are
not so severe as to cripple an institution's finances following a
particularly bad year (of course this could also be accomplished by
putting a cap on the penalty). Regardless, cross-subsidization is
something that the committee should keep in mind when deciding how to
implement risk-sharing proposal.
It should also be noted that another potentially negative
unintended consequence of risk-sharing is that institutions could
effectively credit rate their students applications, and refuse to
admit those students who are most likely to default. A common
refutation of this concern is that ``if the students are likely to
default, then they obviously didn't benefit from the education, and
shouldn't have gone in the first place.'' While it is certainly true
that some individuals are best served not spending considerable time
and money getting advanced degrees, the possibility that schools could
discriminate in the admissions process is still something society has
an interest in protecting against. Fortunately, the risk-sharing
program I am advocating for is unlikely to substantially incentivize
this behavior as long as the penalty is not set too high (I would
recommend no higher than 50 percent). The reason is that there are
typically not binding enrollment constraints at the type of
universities which are most impacted by risk-sharing (high default
rate, high borrowing, and high tuition). In the absence of a binding
enrollment constraint, a school will not turn down an applicant for
financial reasons as long as it is still profitable on average to admit
that applicant (even if he or she does indeed default). In other words,
the tuition must be greater than the sum of the cost of educating the
student and the expected risk-sharing penalty. This is the case at more
than 95 percent of institutions based on the findings from my paper.
There are similar calls for risk-sharing in the Pell Grant system.
Since Pell Grants cannot be defaulted upon, this might involve
comparing the labor market outcomes of Pell recipients against some
benchmark. While I am strongly in favor of implementing risk-sharing in
the student loan market, I am much more apprehensive about its
application to the Pell system. The students receiving Pell Grants are
among the most vulnerable to discrimination, and their success in
higher education is arguably more beneficial to society as a whole than
any other group. For these reasons I would only support a risk-sharing
program applied to Pell Grants if it also contained substantial
protections for this vulnerable student population.
To summarize my testimony, a risk-sharing policy which imposes a
financial penalty on institutions based on the number of dollars
defaulted upon will provide powerful financial incentives for all
institutions to improve the labor market outcomes of their students,
while specifically targeting the institutions which are most
responsible for our national growing student debt burden. The most
effective and efficient risk-sharing policy would be coupled with
reforms aimed at accreditation and consumer information to reduce the
risk of unintended adverse consequences for students.
References
1. Cohn, Elchanan, Sherrie LW Rhine, and Maria C. Santos.
``Institutions of higher education as multi-product firms: Economies of
scale and scope.'' The Review of Economics and Statistics (1989): 284-
90.
2. Johnson, Nate, Leonard Reidy, Mike Droll, and R. E. LeMon.
``Program Requirements for Associate's and Bachelor's Degrees: A
National Survey.'' (2012).
3. Long, Bridget Terry. ``How have college decisions changed over
time? An application of the conditional logistic choice model.''
Journal of Econometrics 121.1 (2004): 271-96.
4. Webber, Douglas A. ``The lifetime earnings premia of different
majors: Correcting for selection based on cognitive, noncognitive, and
unobserved factors.'' Labour Economics 28 (2014): 14-23.
5. Webber, Douglas A. ``Are College Costs Worth It? How Individual
Ability, Major Choice, and Debt Affect Optimal Schooling Decisions.''
IZA Discussion Paper: 8767 (2015).
6. Webber, Douglas A. ``Risk-Sharing and Student Loan Policy:
Consequences for Students and Institutions'' IZA Discussion Paper: 8871
(2015).
The Chairman. Thank you very much, Dr. Webber.
Thanks to all the witnesses.
This is an important subject. It's one on which the
committee is looking for answers, and for my way of thinking,
it's one we're likely to very seriously consider incorporating.
I also think it's one where we need to be careful because
when we're talking about such large amounts of money and so
many individuals, there are almost certain to be unintended
consequences from whatever we do, so I'd like to do it
carefully.
Dr. Webber, for example, you talked about one unintended
consequence which you found in your research paper might be
that we might raise tuition. Another might be that we might
find schools dropping out of the loan program. For example,
Tennessee has 13 community colleges. Four do not participate,
two are dropping out now. The tuition at Tennessee community
colleges is now free. In California, Texas and Florida, it's
basically free if you're low income because of the Pell Grant.
Are we likely to see--would one effect of a risk-sharing
program be to cause many of the 2,000 community colleges, for
example, to drop out?
Dr. Webber. That's absolutely a potential worry. While I
haven't examined that specific outcome in my research, that is
essentially the next step--calculating how likely it is based
on the current financial situations of these schools that the
cost would essentially push these institutions over the edge.
While I don't have an answer on the----
The Chairman. Well, we'd be interested in your next
research.
Dr. Webber. Absolutely.
The Chairman. Mr. Silberman, let me ask you another
question. One suggestion that several of us have made is that
part-time students are entitled to the same amount of loan that
a full-time student is. A low-income student might get a Pell
Grant for up to $5,600, and then be entitled to a full loan.
Should we make more of a difference between part-time and full-
time students in terms of the amount of aid that they're
eligible to receive?
Mr. Silberman. I would say yes, Senator. The basic premise
is that we ought to give universities the opportunity to limit
the amount of debt that students take on, and in circumstances
where students are attending only part time and essentially
don't need living expenses if they're full-time working and
going to school part-time, then I think giving the universities
the opportunity to limit that would be an excellent mechanism
for trying to lower overall student debt.
The Chairman. Is it your experience that the Federal law
gets in the way of the ability of colleges and universities to
provide as much counseling as they would like to? Is that
correct? Do you find that a problem, or is it just that
universities just aren't doing a very good job of providing
counseling to students about how much borrowing they should do?
Mr. Silberman. I'm not aware of ways in which the Federal
law keeps us from doing the proper amount of counseling. I
mean, I feel like at Strayer University we have an adequate
counseling program and we're very focused on it, so I'm not
aware of that, sir. Certainly to the degree that it would
exist, then I would recommend that it be changed. I mean,
giving universities the opportunity to counsel students on the
impact of the loans they take on is an important part of
getting them enrolled.
The Chairman. Dr. Kelly, what do you think about the idea
of giving individual campuses the opportunity to decide how
much of a Federal student loan a student might be entitled to?
Aren't there some risks with that? I mean, you might say that
even in a great university, you might not want to loan as much
to a drama major as an engineering graduate. You might do it by
category, or you might even say that the risk-sharing doesn't
cut in until you borrow more than the amount of tuition, say if
you're at a community college and you already have a Pell
Grant, and you even can get up to $5,600 for a $3,700 tuition
and fee bill. Then you come back around and you say, ``well,
I'm also entitled to a $5,000 or $6,000 loan.'' What is your
thinking about that?
Mr. Kelly. With any risk-sharing policy, it's absolutely
critical to find a way to disaggregate the cost that
institutions can control from those that they can't control. As
you say, colleges don't have control over how much students
borrow for living expenses.
There are two options. One would be to apply whatever the
risk-sharing formula is to a subset of the loan balance, the
outstanding loan balance. That would sort of separate out the
loans that went to tuition. Another option is to allow colleges
to limit student borrowing.
I would just say the Department of Education currently has
an experimental sites project underway right now that is
allowing some community colleges and, I believe, a couple of
for-profits to limit borrowing. I would look there for examples
as to whether this policy is working effectively.
The Chairman. Thank you, Dr. Kelly.
Senator Murray.
Senator Murray. Thank you very much, Mr. Chairman.
Thank you all for your testimony today.
Ms. Wang, let me start with you. I believe that we need to
work on ways to make college more affordable for all of our
students and families. As we consider this concept of risk-
sharing, it's really critical that we keep in mind the
importance of maintaining access and preserving affordability
and rewarding institutions that are serving the most
underrepresented communities in our country and setting up
students for success.
In your testimony, you recommend the creation of a risk-
sharing system that can actually lower the total cost of
attendance at all institutions of higher education. Can you
take a minute and elaborate more on the ways in which expanding
current accountability measures could potentially make higher
education more affordable?
Ms. Wang. Sure. Currently we have a 90/10 rule. We believe
that this committee could debate returning to an 85/15 rule to
ensure further accountability, particularly at career education
programs.
I want to touch on the point that you mentioned on
maintaining access, because we are first and foremost also
interested in maintaining access and success. I believe that
any risk-sharing proposal that the committee debates should
take that into account by not only imposing a rule on
institutions but also encouraging them to improve and create a
well-targeted mechanism that actually incentivizes institutions
to treat their lower-income students, their Pell students, and
particularly their underrepresented students well and connect
them with real careers. There are current rules we can
strengthen, as well as new ideas.
Senator Murray. OK, thank you.
Dr. Webber, one of my top priorities as we work to
reauthorize the Higher Education Act is going to be to reduce
the crushing burden of student debt. We know that student loan
debt has now hit historic highs. More than 40 million Federal
and private student loan borrowers collectively owe more than
$1.2 trillion. That's rather stunning.
I wanted to ask, how do risk-sharing proposals like yours
have the potential to reduce loan debt for the students?
Dr. Webber. In terms of a risk-sharing policy like this, it
would incentivize schools in whatever way is best for them that
could reduce their own students' debt. For instance, in many
schools there has been a large increase in the requirements for
particular programs, the number of credits. The average
community college program, while the norm is certainly 60
credits, the average program now requires at least 65 to 66
credits to receive an AA degree, and this even applies to
general education. In many schools, it's above 70.
Certainly some of these are due to accreditation
requirements. Some of this is just because schools are
potentially trying to push new classes. This both increases the
time to a degree, and it also increases the student loan debt
that students are taking on. It also reduces the likelihood
that these students will eventually graduate.
Furthermore, many of the programs described in the consumer
information hearing would allow students and their parents to
make more informed choices and would therefore lead to less
debt taken on. Basically anything that incentivizes schools to
find ways to help their students' future labor market outcomes.
Senator Murray. OK, thank you.
Mr. Silberman, Strayer University markets heavily to
prospective students so you can maintain and grow your
enrollment. In your testimony, you noted that many colleges and
universities have an incentive to increase enrollments rapidly,
and that carries with it some risk for students and
institutions. Do you believe that Federal financial aid funds
should be used to pay for advertising and marketing campaigns,
and is that an appropriate use of Federal taxpayer dollars?
Mr. Silberman. I'm not sure there's a way to actually
distinguish. In other words, the revenue that comes into a
university, whether it comes from however students are paying
their tuition, it then is used by the university to run its
programs. I would not characterize our expenditures on
advertising as heavy, certainly relative to other universities
around the country. It's not clear to me how you would
differentiate or disaggregate dollars that are associated with
title IV loans to students from other ways in which students
pay.
I do think that the amount of a university's expenditures
on its instructional and educational costs is a relevant
factor, and it's certainly one that we look at closely to make
sure that we are achieving the learning outcomes for our
students. Ultimately, that's what it should be measured on. If
the students that you're enrolling are succeeding in their
studies and ultimately are accruing the benefit of the
investment they make in education through improvements in their
lives, then the system is working. Then it's valuable. From
that standpoint, I think that's the best way to measure it.
Senator Murray. OK, thank you.
Thank you, Mr. Chairman.
The Chairman. Senator Cassidy has asked that we go next;
and, Senator Whitehouse, you would be next.
Statement of Senator Whitehouse
Senator Whitehouse. Thanks very much.
First of all, Chairman, thank you for this hearing. This is
a really important question of how you align the incentives
between the folks who operate the higher education institutions
and the folks who attend them to make sure that everybody is
pulling in the same direction, toward student success. As I
think Dr. Kelly opened up and said, there are not adequate
incentives right now for institutions to promote student
success.
If you're going to align incentives toward student success,
you have to have some kind of a definition of what student
success looks like, and that has been a very challenging
question for the Department of Education in its administrative
efforts. Is there a way to make that an easier question, or is
that necessarily just going to be a difficult question? What
would be, in your view, the simplest benchmarks for that
student success?
We'll start with Dr. Kelly, Mr. Silberman, and go right
across.
Mr. Kelly. One of the benefits of a risk-sharing system
that would judge institutional performance on the basis of
whether students are able to pay back their loans is a basic
baseline for student success. It's what the Federal Government
as a lender should be interested in evaluating, frankly.
There are lots of other definitions of student success that
consumers will have. Some people want to make a lot of money in
their career. Some people want to have a fulfilling career in
public service, and different departments in different
institutions will provide those things.
What's critical in all of this is to have outcomes, student
outcomes that are not necessarily within the institution's
control, and by that I mean not just completion and not just
assessments on the campus but actual labor market outcomes. Of
course, institutions could print a bunch of diplomas and
certificates that may not be worth much, so we need a validated
third-party signal of success.
Senator Whitehouse. Looking beyond just payment rates.
Mr. Kelly. There's room to look beyond payment rates. The
Federal Government's basic interest is in lending to programs
that allow students to repay their loans. That's a baseline.
That consumers are going to have different definitions of
success beyond that.
Senator Whitehouse. Mr. Silberman.
Mr. Silberman. I would agree with Dr. Kelly. When running
an educational institution, the first measure of success that
we look at is our students' achievement learning outcomes and
are they progressing toward the fulfillment of their degrees,
and then graduating.
The degrees that we offer tend to be more commercially
focused--business administration, finance, accounting,
information technology--so those tend to lend themselves to
success in the marketplace after they've received their
degrees. There is no reason why universities can't offer
degrees that are of more esoteric interest and purposes.
Ultimately, the Federal Government's interest is as a
lender, and so the repayment of the loans that are issued to
students to pay for their tuition is an important metric of
success. I've always felt that way.
Senator Whitehouse. I've just got a minute left, so let me
actually interrupt and ask the second question I wanted to get
to since it's you, you're the person I wanted to ask.
Very often, what we hear from the higher ed community,
particularly the for-profit higher ed community, is, hey, if
you ask us to share the risk of student performance, then what
we're going to do is we're going to limit ourselves to low-risk
students, the ones who are most likely to perform, and that's
going to limit the access of folks who we perceive to be
higher-risk students, and that's not good for particularly
first-generation college attenders and so forth.
How do you react to that theory?
Mr. Silberman. Well, you haven't heard that from us,
Senator.
Senator Whitehouse. Good.
Mr. Silberman. We have better learning outcomes than most
public institutions, and 40 percent of our students are Pell
eligible, 40 percent of the overall students, 60 percent of our
undergraduate students. We've always, for over 100 years,
served an under-served, under-privileged, working-adult student
who needs to go back to school. There's no reason why you can't
achieve solid learning outcomes and ultimately have your
graduates perform well in the marketplace and be held
accountable for those standards.
It's true to say, as you've heard from other panelists
here, that there is a tradeoff between concepts of risk-sharing
and access. Institutions will not be able to uniformly just
deal with the idea that we're held accountable at a level and
that individual tradeoffs that are made every single day are
going to err toward more responsibility toward students.
Ultimately what we should be looking for is that students
who are enrolled in universities have an adequate chance of
succeeding, they're adequately prepared, and that they're in
college for the right reasons, and that therefore gives them a
chance to succeed. Not every student will succeed. If the
institution has any academic standards, you're going to have
some academic failures. That's the nature of it. It's a bit of
a tradeoff, but there's no reason why the tradeoff can't be
made.
Senator Whitehouse. Thank you very much.
My time has expired. Again, thank you, Mr. Chairman.
The Chairman. Thank you, Senator Whitehouse.
Senator Warren.
Statement of Senator Warren
Senator Warren. Thank you, Mr. Chairman.
Right now, colleges that offer a high-quality education and
colleges that offer a low-quality education have essentially
the same access to Federal loan money, and this easy access to
student loan dollars give colleges far less incentive to
contain costs, far less incentive to improve educational
quality, and far less incentive to discourage students from
taking on too much debt.
We also have seen some recent reports that some for-profit
colleges that serve veterans, students who are the first in
their family to attend college, are even willing to commit
outright fraud in order to get access to Federal loan dollars.
One important part of the solution is to give colleges some
skin in the game on student loan repayment. As Senator Reed
testified, he and Senator Durbin and I have been working on a
bill on this for a long time, a risk-sharing bill, and I'm very
pleased that the Chairman is considering whether or not we
should do risk-sharing as we do the Higher Education Act.
What I want to think about, though, is what the tradeoffs
are in the Act when we do that. Dr. Webber, I've looked at your
work about modeling out the impact of risk-sharing, and you've
made it clear that you believe it could reduce student default
rates, student loan default rates. I know that you also support
risk-sharing, Dr. Kelly, and you point out that this kind of
proposal could replace some existing regulations.
In principle, I agree. Smarter, simpler rules that align
market incentives are better than complex technocratic rules
that don't change incentives, but it's critical we get the
details right. This is where my question focuses.
Dr. Webber, when you considered the impact of risk-sharing,
did you assume that the current Higher Ed regulations would
remain in place?
Dr. Webber. I did.
Senator Warren. Did your research reach any conclusions on
whether implementing risk-sharing would make other Federal
regulations unnecessary?
Dr. Webber. No. That was--the nature of the research was
because I was trying to evaluate a hypothetical. I can really
only handle one hypothetical at a time.
Senator Warren. Fair enough, fair enough. Good to move only
one variable at a time. OK.
Dr. Kelly has argued that instituting risk-sharing on
student loan repayment, the Federal Government might be able to
do away with certain key accountability measures, as Ms. Wang
discussed, like cohort default rates, the 90/10 rule, and the
gainful employment regulation. I just want to think about what
we know about the impact of those Higher Ed regulations.
Dr. Webber, you noted in your research that when strict
default standards were put in place back in 1991, that cohort
default rates dropped 33 percent in a single year. Would you be
concerned about rolling back a measure that had such a
substantial and positive impact?
Dr. Webber. Well, first I would say that also happened to
take place during an economic recovery.
Senator Warren. Fair enough.
Dr. Webber. There was some tinkering.
I would certainly be concerned. However, I feel that, as
Dr. Kelly had mentioned before, the access to title IV funding
is a very blunt measure that only incentivizes a very specific
type of institution that is above the 30 percent threshold. It
does absolutely nothing for those under it. We could actually
even keep the existing regulation and just add incentives for
those under the threshold.
Senator Warren. All right. That's a very helpful point.
Thank you, Dr. Webber.
I just want to be clear on this. Simple, structural rules
to help this market work better is something that both
Democrats and Republicans should support. Before we even
consider eliminating any of the rules that have actually helped
stem the rising tide of defaults, we should be certain that we
are putting in place a stronger system that will help students.
There may be a path here, but we want to be very careful that
we are not making things worse.
Thank you, Mr. Chairman.
The Chairman. Thanks, Senator Warren.
Senator Cassidy is in an overwhelming bipartisan mood this
morning.
[Laughter.]
The Chairman. We now go to Senator Franken.
Statement of Senator Franken
Senator Franken. He's doing something that's exemplary,
which is he's in listening mode. He got here because we're all
busy, and he got after a lot of the testimony, et cetera, and I
admire that. You're in a listening mode, and that's clear, and
we should all learn from the Senator.
Mr. Silberman, Senator Harkin was very critical of for-
profits, and you read a quote from him about Strayer that was
very complimentary, so clearly you're doing something right.
According to a 2009 HELP Committee report, I just want to go
through some of the spending on how Strayer spent money.
Per student, $2,448 on marketing in 2009. You made $4,520
per student on profit and spent $1,329 per student on
instruction.
As I said, Chairman Harkin said nice things about this
school, so you got good results. I want to just put these
numbers in perspective, $1,329 per student on instruction. The
University of Minnesota spends $13,247 per student on
instruction, about 10 times as much.
This seems to be a pattern. Does the spending, does that
reflect most for-profit schools? I just want to emphasize again
that you quoted Senator Harkin saying good things about you.
Mr. Silberman. Right. Senator, you have me at a bit of a
disadvantage since I don't see what you're quoting from, but I
can tell you that----
Senator Franken. It's a 2009----
Mr. Silberman. If you'd let me finish, Senator. We spent
significantly more than $1,300 per year per student on
instruction. Fifty-five percent of our expense is in
instructional educational costs. Off the top of my head, our
expense over the previous year is about $350 million, which
means that we're spending close to $180 million per student in
instructional cost, and we have about 40,000 students. That's
well more than $1,300.
I don't have that report. I'm glad to take a look at it and
correct it.
Senator Franken. OK.
Mr. Silberman. The last point I would make, though----
Senator Franken. I don't have much time, so I just want to
develop this. You may dispute these numbers. This is in a 2009
HELP Committee report.
There is a pattern in for-profit schools of spending a lot
more on marketing than public universities, of course, and
colleges, and also private but not for-profit schools, non-
profit. The claim is that, from for-profit schools, there's a
high default rate because they have a non-traditional sort of
student, and I understand that. That kind of cuts both ways,
because when these schools tend to spend so much on marketing
on non-traditional students, that means their parents didn't go
to college and there may be a lack of sophistication, that
these students may be more susceptible to marketing, seeing a
30-second commercial which looks like non-traditional kids, you
get a great education and do great in your career.
The schools will have incredible default rates. I'm not
talking about your school now, but this happens all the time in
the for-profits. This cost-sharing is a very, very good idea.
There's another area that for-profits--and, Ms. Lang, you
talked a little bit about going to an 85/15. One of the things
about the 90/10 rule that has gotten a little cockeyed is using
the GI bill money toward the 10 percent. We've heard some
horror stories about veterans who are targeted, including Holly
Petraeus telling me about someone with TBI recruited out of a
hospital, a veterans hospital to a school.
What do you think about the idea of not having that go to
the 10 but have that go to the 90, the GI bill money?
Ms. Wang. We hear from veterans all the time about this
instance. In fact, the story that I shared about Mike DiGiacomo
owing $85,000 as a veteran because he went to a school that
didn't prepare him, unknowingly went to a school that wouldn't
prepare him. There is certainly room for more accountability
with the 90/10 rule.
Senator Franken. OK.
Well, my time is up. Thank you.
The Chairman. Thank you, Senator Franken.
Senator Cassidy.
Senator Cassidy. I'll go once more.
The Chairman. That's all right.
Senator Casey.
Senator Casey. Mr. Chairman, thank you for having the
hearing, and I want to thank our witnesses, especially Dr.
Webber, because you're from Temple. We also appreciate the work
that you've done.
To prove that we even read footnotes around here, I want to
direct your attention to a footnote that involves Temple. Your
testimony in Footnote 12 says,
``Temple University President Neil Theobald
introduced an innovative program entitled `Fly in 4'
which provides grants to students in exchange for
meeting regular progress to degree benchmarks and have
promised not to work more than 10 hours per week during
enrollment.''
Can you talk a little bit more about that program?
Dr. Webber. Sure, absolutely. Certainly there are many
universities around the country which are rightly concerned
with the time it takes to get a degree, as this is one of the
key factors in the student loan debt. However, one of the
really innovative parts of this program is that it
incentivizes--it asks students to commit to not working more
than 10 hours per week, which is important because research has
found that for students who work effectively more than 10 hours
per week, their likelihood of eventually graduating decreases
substantially.
Combining this with meeting every single semester, meeting
benchmarks toward progress to a major, combined with additional
grants to the student which reduces their student loans, it's
potentially--now, these students who are in the Fly in 4
program have just been--they're only 1 year into it, so it's
hard to evaluate the long-term effects, but it has the
potential to be hopefully a model program for a lot of other
universities.
Senator Casey. I asked you, but I would also open it up to
the panel. How can we do a better job of incentivizing colleges
and universities to invest in similar programs like Fly in 4?
Do you have any sense of that in terms of incentives?
Dr. Webber. In general, because there are so many different
mechanisms through which students' loan debt could be reduced,
the incentive system like the one proposed today would allow
schools to make the right choice for them, that for some
schools time-to-degree is a problem. For others it might be the
actual graduation rate. For others it might be tuition rates. A
general system such as the risk-sharing penalties we described
would let schools make their own choice as to what is best for
them.
Senator Casey. Ms. Wang.
Ms. Wang. I agree. There's also some innovation that this
committee could consider around how we can best incentivize
institutions to not just enroll more Pell students and
underrepresented students and first-time college students but
also to help them succeed while they're in school and prepare
them adequately or very well to compete in the marketplace.
One idea is to reward institutions that are doing the best
job of preparing, graduating, and putting forward students into
the economy that are going to compete well in the workforce,
with particular attention paid to Pell students and
underrepresented students. We know that these students succeed,
and the research shows that students, even though they might be
low income, even though they might be Pell students, if the
institution has the best practices, those students absolutely
succeed. That's where the research is, and it's not about
student characteristics. It's about good practices at the
institution.
Senator Casey. Thank you.
Mr. Silberman and Dr. Kelly, we've got 32 seconds.
Mr. Kelly. I would say that a risk-sharing system is
designed precisely to incentivize this kind of behavior, and we
are learning a lot from researchers and institutions that are
innovating on their own campuses about what it takes to prepare
students, even the most at-risk students and the students that
are typically the hardest to educate.
The City University of New York just launched a really
impressive experiment that has doubled graduation rates for
developmental education community college students. So we're
learning more. We need incentives for people to adopt promising
practices.
Mr. Silberman. I would just very briefly say that the use
of innovation is key to everything that we do. As Senator
Franken said, we're generally teaching non-traditional
students, students who come with less academic background. Both
the use of teaching methodologies and technology is crucial to
us achieving our mission, and we live that every day.
Senator Casey. Thanks very much.
The Chairman. Next is either Senator Baldwin or Senator
Cassidy.
[Laughter.]
Statement of Senator Cassidy
Senator Cassidy. Thank you, Senator Franken, for your
gracious comments. I want to thank my colleagues because you
all thought deeply about this, and so I have been listening,
and I've learned. Thank you.
Dr. Kelly, I could ask this of anyone, but I'll start with
you. I spoke once to a university president, and he said
actually kids will enroll, go to a week's worth of classes, get
their Pell Grants, and never show up to classes again. He's a
university president. Is there a frequency distribution of
dropouts?
Mr. Silberman, in the first 3 weeks you have some sort of
process.
Is there a frequency distribution where, my gosh, we've got
20 percent of the people dropping out within a month, but then
it tails off? Or is it uniform? Do you follow what I'm saying?
How much of this--is the student, really, the problem? I'm just
asking.
Mr. Kelly. I would defer to my colleague here to speak
about his own institution's pattern. My sense is that, yes,
most dropouts take place early on in a student's career.
Senator Cassidy. ``Early on'' means either in the first
year, in which case perhaps the child is not well-prepared in
basic math, or it could be in the first 3 weeks, because the
word on the street is that you can sign up for classes, get a
Pell Grant and, boom, buy a car, but never show up to classes
again.
Mr. Kelly. With existing Federal data, it's difficult to
know at what point in time the actual dropout is taking place.
I will say this is partly, to tack onto my colleague, part of
what we need to figure out is how to give people access to very
low cost and very low risk, maybe even trial periods, to see
whether this is right for them. They can avoid debt that way.
Senator Cassidy. I get that totally. That assumes good will
on the part of the student.
Mr. Kelly. Sure.
Senator Cassidy. Again, I don't know if there is bad will.
Because I was told this anecdotally by a person who cares about
it deeply, it comes to mind.
Mr. Silberman, do you have any thoughts on that?
Mr. Silberman. Particularly when you run what aspires to be
an open-access university, where you're really just trying to
make sure there's adequate preparation but you're not accepting
or crafting a student body around exclusivity, you run into the
risk that certain students or prospective students are not
serious students. That's what our enrollment and admissions
process is designed to ferret out--to establish the seriousness
of the student.
Senator Cassidy. Let me ask, you put in that 3-week trial
period and you have a controlled experiment. You have before
the 3-week trial period, and you have an after the 3-week trial
period. Can you give us any insight as to your default rate as
you went to your 3-week trial period?
Mr. Silberman. We actually don't have a 3-week trial
period, and the reason that we don't, Senator, is that our view
is that our admissions process is rigorous enough that by the
time we enroll the student, we're convinced that the student is
capable and serious about succeeding.
The trial period in some cases is a replication or a
replacement for a more rigorous admissions process.
Senator Cassidy. Got you. Let me ask, so you found that,
and I don't mean to be rude, we just have limited time. You
mentioned that the basic math and poor English language skills,
I gather you've done some sort of analysis and these are the
two variables that pop out.
Mr. Silberman. Correct.
Senator Cassidy. Are those remediable, or should every
institution be looking at that same thing? And if this is the
risk factor, then that person should go into some sort of
remediation before being allowed to matriculate into the
broader curriculum?
Mr. Silberman. Well, it's even more severe for our students
because they're actually 35 years old and they've been out of
high school for 15 to 20 years.
Senator Cassidy. You say that, and that's intuitive, but do
you actually have data to show that if the child or the person
enrolls right out of high school, they would do better than
someone 35?
Mr. Silberman. Well, on average, yes.
Senator Cassidy. I just say that because if you have poor
math skills and language skills, it may suggest that you
weren't a very good high school student.
Mr. Silberman. In our case, we have to establish that
through a high school transcript to make sure that they have a
valid high school degree. In general, skills in math and
English do deteriorate for the number of years that you're
outside the classroom. The benefit that we have is that our
students tend to be more mature, obviously, and more serious.
We're dealing with an easier student to teach.
The answer to your first question is yes. Our statistical
analysis going back 15 years shows that the single most likely
predicate or the most reasonable predicate to academic success
is math and English skills, and in our case if a student
doesn't establish that, either through an SAT score or
transferring college-level credit, we require them to take a
remedial course before they can enroll in college-level work.
Senator Cassidy. Mr. Webber, this is not something you've
done research on, but I would just be interested in your
thoughts, or anyone's thoughts. Perhaps a university could be
less at risk if they put in a best practices, and that might be
a remediation for math or English. You mentioned in your
research, the footnotes of 14 through 16, about how best
practices have been shown. Ma'am, you also showed this.
Thoughts about saying, ``Listen, you're on the hook, but
you're less on the hook if you can document you've done best
practices.'' Would that be a reasonable approach?
Mr. Silberman. Absolutely.
Senator Cassidy. Any other thoughts on that? Is that
practical, or is that something that likewise would be gamed
for bureaucratic overreach?
Mr. Silberman. I'm just going to say that the key attribute
for me in terms of the success of a regulatory or legislative
structure is its simplicity. To the degree that you keep it
simple and it's easy to follow, then I think it has a very high
chance of success, and I think best practices should be
rewarded. In many cases, though, the best practices will just
devolve into the academic outcomes and the financial outcomes
in terms of the default rates.
Senator Cassidy. I yield back, and thank you.
The Chairman. Thank you, Senator Cassidy.
Senator Baldwin.
Statement of Senator Baldwin
Senator Baldwin. Thank you, Mr. Chairman. I want to thank
you for convening today's hearing and this continuing set of
conversations about reauthorization of the Higher Education
Act. I certainly appreciate Senator Reed being here earlier to
talk about his leadership on today's topic, and our panelists.
Thank you all for being here.
We've heard a lot about the need for colleges and
universities to have skin in the game when it comes to student
loan debt and default rates, with a focus on accountability
metrics, and I wanted to take the opportunity to highlight a
risk-sharing program that's been in place for many years, the
Federal Perkins Loan program. In this campus-based loan
program, participating schools share the risk by providing a
one-third match to the Federal funding, and loans are made
using funds repaid from previous borrowers, which encourages
the institution to keep their default rates as low as possible.
As a campus-based program, Perkins also allows institutions
to target aid to those students most in need. In my home State
of Wisconsin, the Perkins program provides more than 15,000
students, those students having exceptional need, with more
than $28 million in aid, and the default rate has been less
than 8 percent.
This program has been successfully helping students since
1958 but will expire this September if Congress does not take
action to continue it.
I want to start with Ms. Wang and Dr. Webber, if you could
speak to the importance of the Perkins Loan program both in
helping low-income students and in providing a model of
institutions engaging in risk-sharing. Are there ways we could
build on this longstanding program?
Ms. Wang.
Ms. Wang. Absolutely. I want to echo your concern about the
Perkins Loan expiring, and this committee should dedicate some
time and think through how we can best continue loan programs
that are there for students to maintain or even increase
access. We have believed for some time that loans were created
for low-income and in some cases middle-income families to be
able to attend school. I have concerns about loan programs,
cutting off access if they end, and I also have concerns about
loan limits because we have heard from students that some of
them don't have enough funds to complete, and we have heard in
some instances that they drop out because they don't want to
turn to private student loans. Absolutely, we need to maintain
that access for students.
Senator Baldwin. Dr. Webber.
Dr. Webber. Since Ms. Wang has correctly mentioned the
importance of the Perkins student loan, I'll just briefly
mention from a risk-sharing standpoint.
The broad structure of the Perkins Loan system absolutely
could be used as a basis for risk-sharing. Personally, and I'm
certainly not an expert on the Perkins Loan system, but it's my
understanding that the actual bite in terms of the penalties
for students who default, that you actually need to have a
substantial number and dollar amount of defaults before there
are penalties for the institution. I would certainly be in
favor of strengthening those. Is it a viable method for
implementing risk-sharing? Yes, I absolutely believe it is.
Senator Baldwin. I only have a minute left and I wanted to
turn to the question that Senator Franken was dealing with when
he ran out of time. I guess it's going to happen again, but the
discussion of the 90/10 rule and its exclusion of education
support provided from the GI bill and the Department of Defense
Tuition Assistance Program.
Could you speak to the importance of properly accounting
for all of our student financial aid dollars? Is there any
reason why these Defense and GI bill dollars should remain
outside of the current or some future iteration of the 90/10
rule?
I would again ask Dr. Webber and Ms. Wang for a response.
Ms. Wang. Sure. Certainly, like I said before, There needs
to be more accountability in this space, because we do hear
about marketing practices and in some instances phone calls at
all hours of the day when veterans are looking to go back to
school. We know that some institutions do target veterans. Some
institutions do target low-income students. Others we have
heard target single mothers for their aid dollars. I agree that
there needs to be more accountability in this space,
absolutely.
Dr. Webber. I'll defer to Ms. Wang since this is not an
area of my research and I wouldn't want to speak about
something that I'm not as informed on.
Senator Murphy. That never stops us.
[Laughter.]
The Chairman. That's true.
Senator Baldwin, thank you very much.
Senator Murphy.
Statement of Senator Murphy
Senator Murphy. Thank you very much, Mr. Chairman.
I know at most of these hearings we thank the Chairman for
having the hearing, but I mean it sincerely this time in that
this is a really important idea or set of ideas that we're
talking about, and the testimony was absolutely excellent.
The Chairman. Thanks. We'll give Senator Murray some credit
because this has the advantage of being a bipartisan idea,
really, that we're heard. Thanks.
Senator Murphy. I take the caution of adverse consequences
seriously, but we always have to consider the adverse
consequences of doing nothing. Dr. Kelly's own testimony speaks
to the absurdity of the existing system when 1,300 colleges are
graduating less than 30 percent of students, when 750 are
graduating less than 20 percent. Doing nothing just isn't an
option.
Mr. Silberman, I credit you for being here and being
progressive as compared to the rest of the for-profit community
in your call for action. I wanted to press you a little bit
more on some of the line of inquiry you got from Senator Murray
and Senator Franken.
There's just a fundamentally different structure of
expenses at for-profit universities, and that's borne out by
the data. In 2009, $3.2 billion was spent on instruction writ
large across the industry, while $3.6 billion was spent on
profit and $4.2 billion was spent on marketing. I don't think
you would see that share in the private sector between
instruction and marketing. The average president or CEO salary
in the for-profit world is $7.3 million. The average salary in
the not-for-profit world is $400,000.
We wouldn't be as worried about that if the outcomes were
similar, but basically every study looking at graduation rates
or dropout rates suggest that they are twice that at the for-
profit university than they are at the not-for-profit
university.
It's kind of hard to ask you to answer for the sins of the
industry, especially when you're here in part because you have
been singled out as an institution that's doing better than the
average.
I guess I'm hearing your testimony to say that you
shouldn't worry about the way in which for-profit universities
spend money as long as you get the outcome measurements right,
and I want to make sure that I'm hearing you correctly because
when you're talking about universities that are essentially
accepting 90 percent of their money from the U.S. taxpayers and
then spending it in ways that are just mismatched with how not-
for-profit universities spend their money and getting much
worse results, that is why you hear us saying wait a second, we
should be having a conversation about how this money is spent,
whether or not it makes sense for U.S. taxpayers to be spending
money that leads to salaries in the $7 million range.
I hear you to be saying, listen, just get the metrics right
as to the results and don't worry about how the money is spent.
I want to give you sort of a second crack at that answer
because you're hearing a consistency of concern about how money
is spent at the for-profit college level.
Mr. Silberman. Well, Senator, to the degree that there are
concerns, and there may indeed be legitimate concerns, I would
certainly suggest that that same degree of concern should be
applied across the not-for-profit sector. There are
institutions that are--you have to understand that, for the
most part, entities like Strayer University, as Senator Franken
said, are serving non-traditional students. They're serving
students for whom the opportunity to go to college wasn't
routinely part of their planning or their decisionmaking
process.
There are other not-for-profit universities who address
those same types of students in an open-access manner and
indeed have much higher rates of growth, particularly over the
last couple of years. I personally think that dictating the
percentage of revenue that can be used in various expense sub-
categories is over-engineering and is unlikely to be
successful. I would say that to the degree that you think it's
necessary, it ought to apply to not-for-profit universities as
well.
Senator Murphy. Agreed. I appreciate that, and that's why
we need to get the metrics of accountability right, because I
agree that it's hard to do that kind of micro-managing.
Very quickly, Dr. Kelly, you talked about making the
marketplace work better. Would a unitary student record help
the ability to track a student's performance income after
graduation? Would that help try to make the market work better
by giving better information to students?
Mr. Kelly. This is an issue we've written about in our
work. Informed consumers are critical to a functioning market,
and it is our opinion in my work that a student record data
system would provide information that we currently can't get
otherwise, and I look forward to discussing that further.
Senator Murphy. You concur, Dr. Webber?
Thank you very much, Mr. Chairman.
The Chairman. Thank you, Senator Murphy.
Senator Bennet
Statement of Senator Bennet
Senator Bennet. Thank you, Mr. Chairman. Thanks for holding
the hearing, and thanks to the witnesses for being here.
Sign me up for whatever we're going to do here to figure
out how we're going to reform the student financial aid
program. Even before we get to that, we have this incredible
challenge of the cost of college. There are examples all over
the country of places that have done a good job taking down
cost. Colorado Mesa University in Grand Junction is one of
those, and I know there are others as well. They are exceptions
that belie the rule.
When you look at the numbers, in the 1970s when you were
going to college, the State covered roughly 75 percent of what
college would cost, and you had to pick up the other 25
percent. Somehow, you were going to figure it out, work study
or other kinds of things. Pell Grants in 1976 covered 67
percent of what it cost to go to the average college in the
United States. That number today is 27 percent.
I saw a new study out of Pew, I think it was, or the
University of Pennsylvania recently that showed us that in
2012, if you're in the bottom quartile of income earners in
this country, the average cost of college after you've
accounted for student aid cost is roughly 85 percent of your
income, whereas if you're in the top quartile you're at 15
percent.
So for whatever reason, the level of your income that's
required to pay for college--that's not a very eloquent way of
saying it. The purchasing power that's needed to afford an
average college today is dramatically higher than it was 30
years ago or 40 years ago.
What are the causes of that, and how can we approach
financial aid at the Federal level, at the State level, at the
local level, to incentivize costs to actually start to come
down instead of continuing to rise? Because that is what's
driving the fundamental burden that our students face, I would
argue an incredible inequity, because if you are a family in
poverty or a lower income family and you've got to consume 85
percent of your income to get your kid through college, there's
a reason they're not going to finish, whereas if you can only
spend 15 percent of your income, you're going to be better off.
I'm going to start with Dr. Kelly and just come down the
panel.
Mr. Kelly. Sure. I'll say two things quickly so my fellow
panelists can get in, too.
Two things, the risk-sharing system here would put some
pressure on colleges to contain costs, because the more
students have to pay and the more they have to borrow, the
harder it will be for them to pay back their loans, and you'll
be penalized for that. This will put pressure on colleges to
both think about how they are pricing programs, but also think
about innovations within the institution that will allow people
to finish more quickly and so on.
I do think we have to talk, though--and I know this is an
issue you care deeply about--about the supply side constraints,
namely we have a regulatory framework that regulates access to
this market that is biased in favor of the bundled, expensive
college model. It basically judges providers on the basis of
how much they look like a college. We need to lower those
supply side barriers and let in more low-cost competition. That
would have the effect that you're looking for.
Senator Bennet. Let me say, as we get into the Higher Ed
reauthorization, that's something that I'd be interested in
spending more time on.
Mr. Silberman.
Mr. Silberman. I fully agree, Senator, with Dr. Kelly. The
key to lowering cost is innovation. We have tremendous
opportunities in higher education now with technology and the
use of online methodologies to achieve, indeed, higher learning
outcomes at lower cost.
I also agree that, actually, a risk-sharing mechanism and
the overall management of the student loan system is a means of
controlling cost because it's certainly been a means of
inflating cost. Easy credit has led to higher tuition, it's as
simple as that.
Ms. Wang. I would say that I have a lot of concerns about
the current pathway that States are on in disinvesting in
higher education, because we know that the majority of students
actually attend public institutions, and if you went to my
college in the 1980s, it was extremely affordable. You could
cover the cost working full-time over the summer and have money
left over to spend, in addition to what it cost to go to
college. That concept is laughable for my generation because
the number of options out there for students and families that
are affordable and high-quality are dwindling.
Institutions must play a role in lowering the cost of
college, and States have to play a role in boosting what
they're investing in college, because it's the student and the
family that ends up making up that cost difference.
Dr. Webber. I could talk about the causes of the increase
in tuition for more than an hour, which is negative 500 times
what I have left. Let me just say that I'd be happy to follow
up with you and talk about all of this, because there's a lot
of nuance in terms of what has led to the substantial increases
in the cost of higher education over the last 20 or 30 years
that are important to understand.
Senator Bennet. I'd look forward to having that
conversation.
I am out of time, but I would say in closing that one of
the most depressing things I hear in my town halls is we can't
afford to send our kid to the best college they got into. I
mean, that is so contrary to the interests of our families and
so contrary to the interests of the country.
Mr. Chairman, I'd say also that part of this springs from
the fact that we have a federalist system here that we've got
to figure out. We have decisions to make at the State level,
and we have decisions made here, and too often we don't look to
see how those things are syncing up. Thank you.
The Chairman. Thank you, Senator Bennet.
Well, thanks to Senator Baldwin and Senator Bennet--and to
all who have been here--we've had great participation--and to
the witnesses.
You can see that there's a lot of interest here in this
subject, and that it's a bipartisan interest. We've had some
really good success with our elementary and secondary education
act in operating that way.
As one of the Democratic Senators said, sometimes if you
get the incentives right, the regulations aren't as necessary,
although Senator Warren did point out we shouldn't just rip out
the regulations without thinking about it.
Although on the other hand, we've had a distinguished group
of higher education officials come in and tell us, in response
to something Senators Bennet, I and Mikulski and Burr asked
for, that higher education today is a jungle of red tape.
One of my objectives in this reauthorization is to
simplify--Mr. Silberman mentioned about simplicity in
regulation--and make good adjustments.
One of the things we do have to be careful about here is
that if we adjust incentives, we're adjusting a very big
incentive. We're shooting with a very big weapon here. I mean,
the taxpayer spends $100 billion a year of new money every year
on student loans. We make just a little bit of an adjustment
here, it might make a massive adjustment among the 6,000
institutions and the 22 million undergraduates every year, half
of whom have a Federal grant or a loan to help pay for.
That doesn't mean we shouldn't do it. We've heard
discussion about making it easier for campuses to do better
counseling. There are some Federal laws and regulations that
get in the way of that. We've heard about making a difference
between what part-time students and full-time students can
borrow. We're talking here about the risk-sharing as a way not
just to reduce and discourage over-borrowing but generally
giving campuses an incentive to reduce their expenses, and in
that way help reduce the amount of borrowing a student would
need to do.
An example of what incentives can do, is the example at the
University of Tennessee-Knoxville, which is a very simple one,
where the State has said we want to see more students graduate
in 4 years, and that campus has said our way of doing that is
to say you can take fewer than 15 hours if you want to, but
you're going to pay for 15 hours. More students are taking 15
hours.
There may be a lesson for us, because the State put a broad
goal. It allowed the campuses to respond to the incentive,
which was the State will deliver more money based upon what the
graduation rate is. Each campus came up with its own way. When
they adjusted their incentives a little bit, the students paid
a lot of attention.
I would like to ask the witnesses, after hearing what we
said today, and seeing the level of interest of the Senators,
if you would like to respond to us, even if it's a short
statement, that says upon hearing what you said, here are the
three or four things I would do in order about risk-sharing. I
would certainly do this, I would probably do this, I would
think about this and maybe do this. That would be helpful to us
because you're the experts about that.
There's a possibility that when we get into risk-sharing,
we may conclude that there might be multiple options for
different kinds of institutions, and we have to think about the
one option that some institutions might take, which is not to
participate in the loan program. That's very possible,
particularly among community colleges.
This has been a very, very helpful hearing. I would like to
end where I started, and since I'm the only one here, I can
just say whatever I want to.
[Laughter.]
It's nice to be the chairman every now and then.
Sometimes we send the wrong message to students of all ages
who want to go to college. As I said at the beginning, it's
never easy to pay for college, but it's easier than many people
say or think. I mean, half our college students,
undergraduates, have a Federal grant or loan to help pay for
college. Nine million receive a Pell Grant of up to $5,700.
That makes community college free in California, Texas and
Florida, three of our largest States, with money left over.
It's free in Tennessee because of what the State is doing.
You can afford to go to school because if you're low-
income, you can get up to $5,600 to pay for a tuition that
averages $3,700, depending on your level of income. Then on top
of that, you're entitled to a Federal loan to help you pay for
other expenses. As has been said, 75 percent of our students go
to public institutions, and at the 4-year institution the
average tuition is $9,139.
There are many things happening to make access to college
affordable for students, and perhaps risk-sharing might be one
more.
The other thing I'd add, I hear it often said, isn't it
terrible that student loans add up to $1.2 trillion. Maybe it
is, maybe it isn't. Maybe that's good. Maybe that means we have
lots of students going to lots of institutions and getting
ready to improve their lives.
The average student loan for a person with a 4-year
undergraduate degree is $27,000. That's almost exactly the
average of a car loan, an average car loan in the United
States. The total amount of student debt is about $1.2 trillion
in the United States. The total amount of auto debt for
households is $955 billion. It's about the same, and I don't
hear anybody running around saying we need to stop driving cars
because auto debts are so high.
With an auto loan, your car depreciates, and your college
degree hopefully appreciates. At least that's the experience
most of us have.
If we can think of a careful way to adjust this $100
billion that we spend every year in a way that causes our 6,000
institutions, at least those that participate in the Federal
student loan program, to do a better job of discouraging over-
borrowing, reducing their costs, and thereby making it
unnecessary for students to borrow so much, that could be a
very important part of our reauthorization of the Higher
Education Act, and your contributions today have been very,
very helpful.
The hearing record will remain open for 10 days to submit
additional comments and any questions for the record that
Senators might have.
The next hearing of this committee on the reauthorization
of the Higher Education Act will occur on Wednesday, June 3, at
10 a.m., in Dirksen 430.
Thank you for being here. The committee will stand
adjourned.
[Additional Materials follows.]
ADDITIONAL MATERIAL
Strayer Education, Inc.,
Herndon, VA 20171,
June 9, 2015.
Hon. Lamar Alexander, Chairman,
Committee on Health, Education, Labor, and Pensions,
U.S. Senate,
428 Dirksen Senate Office Building,
Washington, DC 20510.
Hon. Patty Murray, Ranking Member,
Committee on Health, Education, Labor, and Pensions,
U.S. Senate,
428 Dirksen Senate Office Building,
Washington, DC 20510.
Dear Chairman Alexander and Ranking Member Murray: Thank you again
for inviting me to testify at the committee's May 20, 2015 hearing on
Reauthorizing the Higher Education Act. I am writing today to correct a
statement made by Senator Al Franken at the hearing, specifically that
in 2009 Strayer University ``spent $1,329 per student on instruction.''
In fact, in 2009 Strayer University spent $6,862 per student on
instruction or educational activities. I respectfully request that this
response be included in the hearing record.
I believe Senator Franken's confusion may have resulted from then-
Chairman Tom Harkin's July 30, 2012 report, For Profit Higher
Education: The Failure to Safeguard the Federal Investment and Ensure
Student Success (hereinafter, ``Report''). The Report stated that in
fiscal year 2009, Strayer spent $1,329 per student on instruction. See
Report at 725. However, that Report erroneously relied on a restrictive
definition of what constitutes spending on ``instruction''--relying
only on one category of data reported to the Department of Education's
Integrated Postsecondary Education Data System (``IPEDS''). See id. at
725 n.2713. According to IPEDS, Strayer spent $50,657,281 on such
``instruction'' in 2009. See id. App'x 21.
IPEDS also reports institutions' spending on ``academic support,''
which includes ``support services that are an integral part of the
institution's primary mission of instruction.'' See Glossary,
Integrated Postsecondary Educ. Data Sys., Nat'l Ctr. for Educ.
Statistics, http://nces.ed.gov/ipeds/glossary/. By relying on the
``instruction'' figure alone, the Report captured only a portion of
Strayer's spending on student instruction. For instance, the
``instruction'' category excludes spending on academic administration
(e.g., academic deans) and also certain information technology expenses
related to instruction. See id. Those expenses are housed, instead,
under ``academic support.'' Id.
As outlined in our SEC filings, Strayer University spent
$218,551,000 on instruction and education in fiscal year 2009, and an
additional $43,072,000 on educational administration. This
$261,623,000, when divided by the 38,128 students Strayer University
educated in 2009, results in $6,862 spent per student on instruction,
well above the $1,329 quoted by Senator Franken. In addition, as
opposed to non-profit universities, which rely on government funding
and tax subsidies, Strayer University also paid $1,800 per student in
Federal and State taxes in 2009.
Strayer has been committed to devoting significant resources to
educating its diverse student body throughout its 123-year history and
will continue to do so in future years. As the Report itself
recognized, Strayer's performance ``is one of the best of any company
examined, and it appears that students are faring well at this degree-
based for-profit college.'' Report at 713.
Thank you for the opportunity to share these thoughts. I look
forward to the opportunity to continue working with the committee.
Very truly yours,
Robert S. Silberman,
Executive Chairman.
Response to Questions of Senator Murkowski by Andrew P. Kelly,
A.B., M.A., Ph.D.
Question 1. During the recent recession, and even now, many recent
graduates have been unable to find jobs simply because employers in
their fields were/are not hiring. Many Americans who were repaying
their loans prior to the recession lost their jobs and their ability to
repay. Should a college be held responsible for borrowers who were
well-educated in fields that normally would have high demand during a
recession?
Answer 1. Ensuring that colleges are held accountable for outcomes
they plausibly have some control over is critical to the success of any
risk-sharing system. Outcomes for individuals who graduate in the midst
of a recession are likely to reflect, in part, economic trends that
colleges have little control over. Therefore, a risk-sharing system
should adjust for economic fluctuations. One way to accomplish this is
to condition the risk-sharing formula on the national unemployment rate
for young workers. For instance, the formula could exempt a particular
portion of unpaid loan debt as follows: multiply the cohort's loan
balance by the national unemployment rate, and then force colleges to
pay penalties on the unpaid balance above that amount. Under such a
scenario, the higher the unemployment rate, the greater the exemption,
thereby shielding colleges from a soft economy.
Question 2. Some proposals have suggested that colleges be
penalized for offering majors in low-demand fields. Who would decide
what a low-demand field is? Would such a determination be made on a
regional, statewide, or national basis? Would such a policy make it
difficult or impossible for a college to offer a degree in, for
example, Alaska Native Studies, Inupiaq, or Tribal Justice--majors
offered by the University of Alaska Fairbanks that are important to
many Alaskans? What about Museum Studies, which is a valuable and
respected field but may not pay as much as, for example, engineering?
Should the Federal Government have the authority to put pressure on a
university's decision about what majors best serve the needs and
interests of the regions and students they serve?
Answer 2. The beauty of a risk-sharing system is that it does not
micromanage colleges with rules from Washington. Instead, it sets up an
outcomes-based system that frees colleges to reach the outcomes in the
way they see fit. When it comes to low-return majors, colleges will
likely have a decision to make: lower the tuition that students have to
pay to access that major (and therefore lowering the amount they have
to borrow that they may not be able to pay back) or modify or eliminate
the program. The key insight here is that we ought not to lend large
sums of money to pay for programs that are unlikely to allow graduates
to pay back their loans; doing so sets graduates (and, more so, drop-
outs) up for financial hardship. To the extent there are majors that
are low-return but critical to society--perhaps the majors listed in
the question--then we should subsidize those programs directly, not
lend money to finance them. A risk-sharing system would encourage
colleges to think carefully about what programs they offer and at what
price.
Question 3. Alaska is one State that is fortunate to have a Tribal
College and University--Ilisagvik College located in Barrow up on the
North Slope. Ilisagvik, like many TCUs, does not participate in Federal
student aid programs. As these institutions expand from 2-year colleges
that primarily offer certificates and associate degrees to 4-year
colleges, participation in title IV student aid programs becomes more
attractive. At the same time, TCUs generally offer open enrollment and
attract students who too often were not well-prepared for college by
low performing BIE and public schools. In addition, many TCUs offer
programs of study related to local priorities, such as Native language
revitalization and tribal governance that may not lead to high-paying
jobs--especially in regions where there is little economic activity. My
question is this: given these facts, how could the risk sharing
proposals outlined here today avoid negative consequences for TCUs and
the student populations they serve?
Answer 3. Student aid programs should adhere to a ``do no harm''
policy--a basic commitment to protecting students from incurring debts
they likely won't be able to repay. To the extent that Tribal Colleges
are publicly valuable--and there are many reasons to believe that they
are--then we should subsidize them directly (as we do already) and/or
implement a bonus system that rewards colleges for graduating at-risk
students.
To be clear, lending money for programs that do not provide
sufficient return to pay the money back is not helping students, it is
harming many of them, threatening their credit and financial future.
Concerns about access are legitimate, but we should use subsidies--not
loans--to ensure that programs that are publicly and socially valuable
but less so economically are able to provide public value.
Question 4. The purpose of this hearing is to examine whether or
not institutional risk sharing will bring down the loan default rates
and increase graduation rates. Several witnesses have suggested basing
an IHE's ``skin in the game'' to cohort default rates. Much of the
student loan default rate is due to students who are unable, for one
reason or the other, to finish their degrees. Perhaps they were not
well-prepared for college, or they cannot afford to pay the difference
between the financial aid and the cost of attendance, or some other
reason but they drop out owing a debt they are not able to repay
because they have not gained the skills that lead to a higher paying
job. The crux of the student loan default problem seems, then, to lie
with IHEs' inability to assist more students to graduate. Would it not
be preferable--instead of limiting enrollment to those students who are
likely to graduate or punishing IHEs for low graduation rates--to
provide incentives for colleges to increase their graduation rates?
Also, would it not be preferable to base institutional risk sharing on
the graduation rates of at-risk students, rather than on cohort default
rates?
Answer 4. Senator Murkowski is exactly right: research suggests
that the most important predictor of default is whether a student
finishes their degree. In many respects, the student debt crisis is
concentrated among borrowers who take on modest amounts of debt but
fail to finish a degree. Ensuring that colleges have incentive to
promote student success is crucial, and I share the Senator's sense
that the struggles of student borrowers are often caused by the failure
to complete.
A risk-sharing system boasts two strengths in this regard: it would
hold colleges accountable for outcomes that occur after students have
left school, and it frees them to bear the risk as they see fit. On the
first strength, contrast that to simply holding colleges accountable
for degree completion rates; doing runs the risk of encouraging
colleges to simply lower standards and print diplomas. That response
would not serve students or taxpayers particularly well. Basing our
accountability policies on measures of labor market success helps avoid
that perverse consequence.
With respect to the second strength, many colleges will respond to
a risk-sharing system by investing in efforts that will boost student
success rates. Researchers have uncovered a number of promising
innovations that cause students to stay in school and graduate at
higher rates, and colleges under a risk-sharing system could learn from
that research in changing institutional practice. Curtailing access
will only help colleges so much under a risk-sharing scheme. They still
need to enroll students to stay in business. In contrast, those that
re-orient their efforts around student success will benefit from
increased enrollments.
It is also worth noting that my proposal calls for a bonus that
would be paid to colleges for every Pell Grant recipient they
successfully graduate. This would help ensure that colleges have
incentive to enroll low-income students and incentive to help them
graduate. Such a bonus would help boost completion rates as the Senator
suggests.
Response to Questions of Senator Murkowski by Robert S. Silberman,
B.A., M.A.
Question 1. During the recent recession, and even now, many recent
graduates have been unable to find jobs simply because employers in
their fields were/are not hiring. Many Americans who were repaying
their loans prior to the recession lost their jobs and their ability to
repay. Should a college be held responsible for borrowers who were
well-educated in fields that normally would have high demand during a
recession?
Answer 1. We believe that institutions should not be required to
meet a potentially arbitrary benchmark when, for example, unemployment
is high and wages stagnate or decline. One mechanism for avoiding such
a situation would be legislation limiting title IV funds awarded to an
institution with a CDR equal to or greater than the national average of
its peer institutions (based upon the risk profile of the students
served) to no more than the amount awarded to the institution in the
previous year. Basing the limitation on a national average, rather than
a pre-set threshold, would adjust for economic factors--like a
recession--that can periodically affect repayment rates without having
any bearing on the level of education provided by an institution or the
field of study. Using a national average would have the additional
advantage of inhibiting institutions' ability to manipulate their CDRs
by managing defaults based on a static target for compliance. We would
welcome congressional consideration of this possibility.
Question 2. Some proposals have suggested that colleges be
penalized for offering majors in low-demand fields. Who would decide
what a low-demand field is? Would such a determination be made on a
regional, statewide, or national basis? Would such a policy make it
difficult or impossible for a college to offer a degree in, for
example, Alaska Native Studies, Inupiaq, or Tribal Justice--majors
offered by the University of Alaska Fairbanks that are important to
many Alaskans? What about Museum Studies, which is a valuable and
respected field but may not pay as much as, for example, engineering?
Should the Federal Government have the authority to put pressure on a
university's decision about what majors best serve the needs and
interests of the regions and students they serve?
Answer 2. We would not be in favor of a proposal that allows the
Federal Government to dictate which programs a college should offer.
Any ``skin in the game'' proposal should leave to universities and
colleges the discretion to determine the degrees they offer and to
assess the success of their various programs. Rather than including
fields of study in title IV eligibility determinations, reform should
build on the existing legislative framework and focus on the overall
ability of the student cohort to repay debt. Unlike the current CDR
approach, which is based on the percentage of student borrowers who
have defaulted, irrespective of the default amount, we advocate a risk-
sharing payment based on a percentage of the actual dollars in default.
One option would be to require such a payment when an institution's CDR
hits 15 percent. The Department of Education would then calculate the
percentage of actual dollars defaulted based on the total amount of
dollars disbursed by the institution that year. If more than 15 percent
of the total dollars disbursed were in default, the institution would
be required to remit a risk-sharing payment equal to 50 percent of the
total defaulted dollars above the 15 percent threshold.
Question 3. Alaska is one State that is fortunate to have a Tribal
College and University--Ilisagvik College located in Barrow up on the
North Slope. Ilisagvik, like many TCUs, does not participate in Federal
student aid programs. As these institutions expand from 2-year colleges
that primarily offer certificates and associate degrees to 4-year
colleges, participation in title IV student aid programs becomes more
attractive. At the same time, TCUs generally offer open enrollment and
attract students who too often were not well-prepared for college by
low-performing BIE and public schools. In addition, many TCUs offer
programs of study related to local priorities, such as Native language
revitalization and tribal governance that may not lead to high-paying
jobs--especially in regions where there is little economic activity. My
question is this: given these facts, how could the risk sharing
proposals outlined here today avoid negative consequences for TCUs and
the student populations they serve?
Answer 3. To create a better prepared workforce, our country needs
a diversity of institutions to meet the educational needs of all our
aspiring students, from traditional college students to the older
working adults Strayer primarily serves, to the residents of Alaska's
North Slope who seek job training and education while strengthening
their culture, language and traditions. This is why we believe that any
legislative proposal should establish a unitary system of regulation
that applies across the board to all institutions that receive title IV
loans as tuition. Excessive student debt impacts every sector of higher
education and does not result from an institution's tax status. A true
risk-sharing regime will require institutions to remit payments based
directly on the amount of their title IV dollars that end up in
default, so that all institutions participating in title IV programs
have the same incentive to decrease student borrowing.
At the same time, all educational institutions need more authority
to mitigate the risk of student loan defaults. Institutions should be
empowered and encouraged to implement common-sense safeguards to
increase the likelihood that students will complete their studies and
not take on debt they ultimately will be unable to repay.
Like Ilisagvik, Strayer has an open-access policy and generally
serves a population that lacked many of the opportunities traditional
undergraduate and graduate students have had. We have identified
certain indicators of academic success and failure within this
population and crafted policies to address these. For example, based on
our own internal research, analysis, and years of experience in this
sector, we have learned that students lacking in basic math and English
skills are much more likely to drop or fail out of undergraduate
programs and therefore pose a high student loan default risk.
Accordingly, we now require students who cannot demonstrate these
baseline skills to pass a non-credit bearing introductory course before
enrolling in title IV-eligible course work at Strayer. Ensuring that
title IV funds are used to support students with the basic
prerequisites for college-level studies benefits both students and
taxpayers, and Congress could consider establishing or recognizing a
national eligibility test to determine whether students possess
threshold skills before they receive title IV funds.
Question 4. The purpose of this hearing is to examine whether or
not institutional risk sharing will bring down the loan default rates
and increase graduation rates. Several witnesses have suggested basing
an IHE's ``skin in the game'' to cohort default rates. Much of the
student loan default rate is due to students who are unable, for one
reason or the other, to finish their degrees. Perhaps they were not
well-prepared for college, or they cannot afford to pay the difference
between the financial aid and the cost of attendance, or some other
reason but they drop out owing a debt they are not able to repay
because they have not gained the skills that lead to a higher paying
job. The crux of the student loan default problem seems, then, to lie
with IHEs' inability to assist more students to graduate. Would it not
be preferable--instead of limiting enrollment to those students who are
likely to graduate or punishing IHEs for low graduation rates--to
provide incentives for colleges to increase their graduation rates?
Also, would it not be preferable to base institutional risk sharing on
the graduation rates of at-risk students, rather than on cohort default
rates?
Answer 4. Our view is that institutional risk sharing is an
equitable mechanism for ensuring that all parties who share in the
gains from the student loan system also share in any systemic losses.
Basing ``skin in the game'' on the CDR has the benefit of building on
the existing legislative framework, including metrics that higher
institutions are already accustomed to monitoring.
By linking risk sharing to actual dollars in default, rather than
percentage of student borrowers who have defaulted, our proposal
creates a more equitable accounting. For example, a student who drops
out early generally defaults on a relatively low amount of title IV
taxpayer dollars, as compared to a student who drops out after a few
years of coursework.
One reason we have not recommended using The Department of
Education published IPEDS graduation rate as a metric is that this rate
measures only the percentage of first-time, full-time undergraduate
students who begin in the fall, excluding all those students who
previously attended another undergraduate institution, are part-time
students, or merely started school in a term other than the Fall term.
Strayer students tend to be hard-working adults taking classes at night
and on weekends while simultaneously managing professional and family
obligations, and Strayer students may start in any one of four
different quarters throughout the year. As such, this Department of
Education IPEDS graduation rate captures only a scant 1.7 percent of
our students.
That said, incentives for colleges could be another mechanism for
improving the higher education accountability system, and we would look
forward to congressional debate and discussion of this potential
alternative.
Response to Questions of Senator Murkowski by Jennifer Wang
Question 1. During the recent recession, and even now, many recent
graduates have been unable to find jobs simply because employers in
their fields were/are not hiring. Many Americans who were repaying
their loans prior to the recession lost their jobs and their ability to
repay. Should a college be held responsible for borrowers who were
well-educated in fields that normally would have high demand during a
recession?
Answer 1. There have been recent economic challenges presented by
the Great Recession that have had a tremendous impact on students and
borrowers.\1\ The average age of home ownership and marriage has
increased in recent years and over half of 18-24 year olds are still
living at home with their parents.\2\ The 1.3 trillion dollars of
student loan debt is a large economic obstacle for our generation,
making it harder and harder to achieve the American dream. However,
students are still held accountable for the debt they accrue while
enrolled in higher education, regardless of the quality of education
they received, or if they even received a credential at all.
Institutions of higher education should have a financial incentive to
do all that they can to improve outcomes for students, for the benefit
of both the students and the broader economic health of America.
Institutions without skin in the game should not be able to blame the
overall state of the economy for not doing all they can to help
students achieve gainful employment after graduation. We want to see
risk-sharing policies that will incentivize institutions to improve
student outcomes as much as they can.
---------------------------------------------------------------------------
\1\ Catherine Rampell, The Great Recession's Lost Generation? Older
Millennials, Washington Post, February 2, 2015, http://
www.washingtonpost.com/opinions/catherine-rampell-older-millennials-
are-paying-the-price-for-bad-timing/2015/02/02/4ef644c8-ab1c-11e4-ad71-
7b9eba0f
87d6_story.html.
\2\ Gillian B. White, What Will It Take for Millennials to Become
Homeowners?, The Atlantic, October 22, 2014, http://
www.theatlantic.com/business/archive/2014/10/what-will-it-take-for-
millennials-to-become-homeowners/381730/; Kelsey Borresen, 5 Good
Reasons to Get Married While You're Young, According to Reasearch,
Huffington Post, November 14, 2013, http://www.huffingtonpost.com/2013/
11/14/married-young_n_4227924.html.
Question 2. Some proposals have suggested that colleges be
penalized for offering majors in low-demand fields. Who would decide
what a low-demand field is? Would such a determination be made on a
regional, statewide, or national basis? Would such a policy make it
difficult or impossible for a college to offer a degree in, for
example, Alaska Native Studies, Inupiaq, or Tribal Justice--majors
offered by the University of Alaska Fairbanks that are important to
many Alaskans? What about Museum Studies, which is a valuable and
respected field but may not pay as much as, for example, engineering?
Should the Federal Government have the authority to put pressure on a
university's decision about what majors best serve the needs and
interests of the regions and students they serve?
Answer 2. In our discussions with young people, we've learned that
they go to college for a variety of reasons, including but not limited
to, finding a job after graduation. They also go to learn more about
the world around them and specific topics they're interested in, to
become a better, more informed citizen, and be exposed to different
individuals with different backgrounds whose lived experience can make
them a more socially adept, well-rounded individual. Because of this,
we do not think the Federal Government should be limiting the choices
of institutions of higher education as to what programs they can offer.
The preservation of individual choice is a time-tested tenet of higher
education in this country.
Question 3. Alaska is one State that is fortunate to have a Tribal
College and University--Ilisagvik College located in Barrow up on the
North Slope. Ilisagvik, like many TCUs, does not participate in Federal
student aid programs. As these institutions expand from 2-year colleges
that primarily offer certificates and associate degrees to 4-year
colleges, participation in title IV student aid programs becomes more
attractive. At the same time, TCUs generally offer open enrollment and
attract students who too often were not well-prepared for college by
low performing BIE and public schools. In addition, many TCUs offer
programs of study related to local priorities, such as Native language
revitalization and tribal governance that may not lead to high-paying
jobs--especially in regions where there is little economic activity. My
question is this: given these facts, how could the risk-sharing
proposals outlined here today avoid negative consequences for TCUs and
the student populations they serve?
Answer 3. We urge the committee to consider applying financial
risk-sharing frameworks to institutions where there is financial risk.
If the majority of students at TCUs graduate debt-free, we would
contend there is no need to subject the institution to financial skin
in the game.
Question 4. The purpose of this hearing is to examine whether or
not institutional risk sharing will bring down the loan default rates
and increase graduation rates. Several witnesses have suggested basing
an IHE's ``skin in the game'' to cohort default rates. Much of the
student loan default rate is due to students who are unable, for one
reason or the other, to finish their degrees. Perhaps they were not
well-prepared for college, or they cannot afford to pay the difference
between the financial aid and the cost of attendance, or some other
reason but they drop out owing a debt they are not able to repay
because they have not gained the skills that lead to a higher paying
job. The crux of the student loan default problem seems, then, to lie
with IHEs' inability to assist more students to graduate. Would it not
be preferable--instead of limiting enrollment to those students who are
likely to graduate or punishing IHEs for low graduation rates--to
provide incentives for colleges to increase their graduation rates?
Also, would it not be preferable to base institutional risk sharing on
the graduation rates of at-risk students, rather than on cohort default
rates?
Answer 4. We absolutely agree that institutions should have
incentives to improve performance. Ideas for promoting institutional
improvement include rewarding institutions that do the best job of
educating students, particularly Pell students and students from
underrepresented communities, and connecting them with real career
opportunities. Along these lines, institutions with high repayment
rates deserve credit for doing a good job, and we encourage the
committee to explore well-targeted methods of encouraging institutions
to do better, starting with the students who need it most.
We also agree that cohort default rates are a blunt instrument that
should be supplanted by a better metric for measuring institutional
performance. We suggest using a repayment rate metric because we
believe that they are a better indicator of student success upon
leaving a program than cohort default rates. They are less subject to
manipulation because borrowers who leave school must actually repay
student debt, rather than simply avoid default using forbearance or
deferment. Repayment rates also more closely measure success than
default rates, which only measure the frequency of the worst possible
repayment outcomes.
In addition to encouraging institutional accountability using a
repayment rate, we suggest that the committee use the following rule
when assessing whether an institution passes: that 45 (and eventually
50 percent) of their graduates are able to pay at least $1 on their
loans toward principal. Simply assessing whether 45 or 50 percent of
graduates are in repayment may not be sufficient because at
institutions where students take on substantial debt, some may have
very low payments or payments of zero under income-based or income-
contingent repayment. We believe that IBR should be a protection for
the borrower, not the institution.
Response to Questions of Senator Murkowski by Douglas A. Webber,
B.A., M.A., Ph.D.
Question 1. During the recent recession, and even now, many recent
graduates have been unable to find jobs simply because employers in
their fields were/are not hiring. Many Americans who were repaying
their loans prior to the recession lost their jobs and their ability to
repay. Should a college be held responsible for borrowers who were
well-educated in fields that normally would have high demand during a
recession?
The ideal risk-sharing policy would punish institutions for only
the defaults which they are ``responsible'' for. As your question
alludes to, recessions cause more defaults outside the control of
universities. I therefore think it is reasonable to tie any potential
penalties to some measure of the national labor market. This could be
accomplished, for instance, by setting up the penalty structure so that
it is based on the average school's default/repayment rate, which would
vary with the business cycle.
Question 2. Some proposals have suggested that colleges be
penalized for offering majors in low-demand fields. Who would decide
what a low-demand field is? Would such a determination be made on a
regional, statewide, or national basis? Would such a policy make it
difficult or impossible for a college to offer a degree in, for
example, Alaska Native Studies, Inupiaq, or Tribal Justice--majors
offered by the University of Alaska Fairbanks that are important to
many Alaskans? What about Museum Studies, which is a valuable and
respected field but may not pay as much as, for example, engineering?
Should the Federal Government have the authority to put pressure on a
university's decision about what majors best serve the needs and
interests of the regions and students they serve?
Answer 2. I would be very much against the Federal or State
Governments punishing an institution based on the majors that they
choose to offer. First, different States have different labor market
needs, and those needs will certainly change over time. Second, as you
point out in your question, the process which would determine which
majors are ``low demand'' would likely be flawed and politicized. As
outlined in my written testimony, I favor a market-based approach to
the issue of student loan debt (and by extension, majors). The issue
now is that institutions are not facing appropriate market pressure
because they do not bear any of the cost of student default.
Question 3. Alaska is one State that is fortunate to have a Tribal
College and University--Ilisagvik College located in Barrow up on the
North Slope. Ilisagvik, like many TCUs, does not participate in Federal
student aid programs. But as these institutions expand from 2-year
colleges that primarily offer certificates and associate degrees to 4-
year colleges, participation in title IV student aid programs becomes
more attractive. At the same time, TCUs generally offer open enrollment
and attract students who too often were not well-prepared for college
by low-performing BIE and public schools. In addition, many TCUs offer
programs of study related to local priorities, such as Native language
revitalization and tribal governance that may not lead to high-paying
jobs--especially in regions where there is little economic activity. My
question is this: given these facts, how could the risk sharing
proposals outlined here today avoid negative consequences for TCUs and
the student populations they serve?
Answer 3. The type of institution you describe is certainly an
important concern. However, it is important to keep in mind the
proposed features of the risk-sharing policy. First, is that there is
only a penalty if a student defaults, an extreme event where the
student is unable to pay even a small amount of their obligations.
Given Ilisagvik College's very low tuition of $2,400 per year, students
do not need to have a high paying job in order to repay this type of
debt. Based on my research, the only schools which would see meaningful
penalties under risk-sharing satisfy each of the following three
criteria: high rate of borrowing, high tuition, and high default rate.
Ilisagvik obviously does not have high tuition, and since they
currently do not participate in title IV programs, they presumably do
not have a high rate of borrowing. Hence, Ilisagvik is not the type of
school which would feel much, if any, financial stress under a risk-
sharing policy.
Question 4. The purpose of this hearing is to examine whether or
not institutional risk sharing will bring down the loan default rates
and increase graduation rates. Several witnesses have suggested basing
an IHE's ``skin in the game'' to cohort default rates. Much of the
student loan default rate is due to students who are unable, for one
reason or the other, to finish their degrees. Perhaps they were not
well-prepared for college, or they cannot afford to pay the difference
between the financial aid and the cost of attendance, or some other
reason but they drop out owing a debt they are not able to repay
because they have not gained the skills that lead to a higher paying
job. The crux of the student loan default problem seems, then, to lie
with IHEs' inability to assist more students to graduate. Would it not
be preferable--instead of limiting enrollment to those students who are
likely to graduate or punishing IHEs for low graduation rates--to
provide incentives for colleges to increase their graduation rates?
Also, would it not be preferable to base institutional risk sharing on
the graduation rates of at-risk students, rather than on cohort default
rates?
Answer 4. You are absolutely correct that graduation rates are an
important determinant of a college's future default rate. However, as
you point out, the learning of relevant skills is another important
factor. The goal is not just to incentivize graduation, but to
incentivize an investment in students' future financial well-being.
While graduation is part of this equation, it is not everything. In
addition to learning a skill, for instance, the amount of time it takes
to receive a degree is also an important determinant of future debt.
The appeal of the risk-sharing program described by the panelists is
exactly that it provides an incentive for institutions to do anything
in their power to invest in their students' financial futures. In this
way, institutions are incentivized to increase graduation rates, as
well as improve career placement/internship services, reduce their time
to degree, and a multitude of other actions as well. It also allows
each school to individually decide the best way to address their
students' debt. For some schools, this may be through improving
graduation rates, but at other schools it may be through some other
channel.
[Whereupon, at 11:58 a.m., the hearing was adjourned.]