As newspaper articles, academic studies, and politicians’ speeches have repeated, statistics suggest that a student loan crisis may be building. The share of students graduating with more than $50,000 in student loan debt has more than tripled since 2000, increasing from 5% in 2000 to 17% in 2014. As a result, this group of “large-balance borrowers” now holds the majority (58%) of the outstanding student debt owed to the federal government, approximately $790 billion of the $1.4 trillion accumulated by December 31, 2017.
In recent days, the idea of “risk-sharing plans,” commonly referred to as “RSPs,” has gathered momentum. In general, these arrangements compel educational institutions to repay taxpayers for some of the loans taken out by their defaulting graduates. One iteration, created by Tiffany Chou from the Office of Economic Policy at the Department of Treasury, Adam Looney from the Brookings Institution, and Tara Watson of Williams College and endorsed by Brookings itself, uses a purportedly hard-to-manipulate repayment rate—the amount each institution’s students have repaid after five years—to set minimum thresholds below which institutions would have to contribute. These scholars currently propose a rate of 20%. Thus, if the repayment rate falls below 20%, the college would be required to pay part of the difference to the federal government, with differing obligations as the rate decreases. According to its defenders, such an RSP would correct for the distortion in the student loan market created by federal guarantees of student loans.
Significantly, this idea received a boost from favorable mention in a white paper released on February 1 by the staff of the Senate’s Committee on Health, Education, Labor and Pensions (or “HELP Committee”), the very committee presently considering various reforms of the federal government’s student loan system. It even earned a reference on page 41 of the President’s Fiscal Year 2019 budget proposal. As of March 26, whether the HELP Committee will include such a program in a future bill and what form it would take remain unknown.