Sunday, September 27, 2015

Why “Skin in the Game” Doesn’t Make Sense

The best data are the ones that correct intuitions.

By that standard, the new ACCT report on student loan defaults, “A Closer Look at the Trillion,”  is full of great data.

It’s based on a study of every community college in Iowa over the last five years.  And although it’s pitched to community college leaders in the spirit of “here are some ways to get default rates down,” it’s also an implicit attack on the idea that the key to getting student loan defaults under control is forcing colleges to put some “skin in the game.”

(Does anyone know the source of that awful metaphor?)

Among its findings:

  • 60 percent of the defaulters in the study earned fewer than 15 credits.  Students who borrowed and who earned fewer than 15 credits had a default rate of 47.8%

  • Students with the lowest balances had the highest default rates.

  • Students who transferred from community colleges to four-year colleges had default rates comparable to students who graduated from community colleges.  In other words, if loan defaults are the issue, community college graduation rates are the wrong measure.

  • Students whose payments were done the traditional way had a default rate of 34.5%.  Students who used Income-Based Repayment (IBR) had a default rate of 3.2%

In other words, if students complete more than fifteen credits and use IBR, the default issue shrinks to an easily manageable level.

Alternately, one could say that the student loan default problem is not a cost problem at all.  It’s a completion problem, and/or an information problem (ignorance of IBR).

The report also taught me a few things.  Did you know that simply paying off a loan doesn’t make the “default” label go away?  I didn’t.  Apparently, if you “rehabilitate” a loan -- meaning, you make nine consecutive payments -- then it moves out of default and you can pay it off.  But if you just pay off a defaulted loan, the scarlet letter stays with you for seven years.  Who knew?

From the perspective of a college trying to lower its rate, a couple of strategies suggest themselves.  First, make sure that students are aware of IBR, and try to make it the default option as much as possible.  And second, focus on retention.  Even if students only get to thirty credits instead of sixty, they’re far likelier to be able to make their payments.

I have to admit being annoyed whenever I hear proposals for getting colleges on the hook for students who default.  If your college is open-admissions, and defaulters often have fewer than fifteen credits, then how, exactly, are you supposed to control that?  Selective institutions can screen out high-risk students, but community colleges can’t.  Blaming colleges for students who walk after a few weeks is obtuse at best, if not actively classist.  

In a better world, a report like this would serve as a spur to the “free community college” movement, or at least to improved state support for community colleges.  But if it motivates campuses to look more closely at IBR, and helps to deflate the pernicious “skin in the game” movement, I’ll take it.  And for heaven’s sake, let’s count “paying off the loan” as escaping default.