This article is adapted from testimony I gave to the United States Subcommittee on Education and Labor, Higher Education and Workforce Investment. Read the full testimonial here.
The Government Accountability Office (GAO) has released a new report on the process of releasing closed schools for federal student loans. When a federally funded college or university closes, students may be eligible for loan cancellation if they cannot complete their studies. More recently, the Biden administration announced $ 1.1 billion in closed school leave for borrowers attending the ITT Technical Institute, a for-profit college that suddenly collapsed in 2016.
The GAO report focuses on how to streamline the process of discharging closed schools and provide relief to borrowers more quickly. But policymakers should also devote their attention to a more ambitious goal: avoiding the need for closed school trips in the first place.
No student enters university with the intention of taking out a loan, only to be released a year later when a school closes. Students go to college in order to obtain a diploma or certificate and increase their earning capacity in the labor market. The government’s closed school policy should therefore be aimed at helping students achieve what they originally came for: a degree.
When a school closes with students still enrolled, those students may be able to complete their academic programs through a process called learning. Alternatively, they can transfer their credits to another college and complete their degrees there. Students who use any of these options will not be eligible for closed school outings, but will get the credentials they originally wanted.
Ideally, the federal government could predict when schools are at risk of closing and take action to protect students and taxpayers. These actions could include a request for financial protection from the college to cover the cost of closed school trips. In addition, the school’s accreditor could push the college to design a learning plan and organize the transfer of credits to other institutions.
But in practice, the government has a surprisingly poor record in predicting school closures. Department of Education calculators routinely make schools on the brink of collapse financially healthy. The Department’s method of assessing the financial accountability of schools once suggested that a school for hypnotists was in better shape than Harvard University, which has an endowment of $ 42 billion.
As a result, the Ministry of Education often waits to act until it is too late. When the Obama administration asked ITT Tech for financial protection, the school was already so deep in the hole that no bank was willing to offer it a lifeline. The institution closed its doors two weeks later, leaving hundreds of thousands of borrowers in deep trouble. School closures associated with ITT Tech’s failure continue.
School closures will always be a reality in colleges and universities. In fact, some creative destruction in higher education is desirable. But brutal school closings, which leave students unable to complete their studies and taxpayers holding the sack, should not be a permanent feature of the higher education system. GAO finds that nearly half of students attending closed schools have neither completed their programs nor transferred their credits.
The private sector has often done a better job than the Department of Education in predicting school closings. In 2016, according to the GAO, private credit rating agencies granted junk bond status to 30 for-profit schools that passed their official federal financial exams. Policymakers should take advantage of in-depth institutional knowledge and sharper financial incentives from the private sector to help the Department predict when schools will close.
The solution is to require schools to take out insurance to cover the costs associated with trips to closed schools. Each year, the Department of Education would calculate the total potential liability of taxpayers in the event of a school closure. Schools dependent on federal loans would then be required to purchase insurance in the private market to fully cover these potential losses. In case of failure of the institution and granting of closed school discharges, the insurance company makes the taxpayers free.
The main advantage is that insurance companies could vary school premiums depending on the financial risk presented by each school. Institutions with a more solid financial base would pay lower premiums. Schools with a well-defined education plan and agreements with other colleges to ensure credit portability would also benefit from a reduction in their premiums. But underground schools might not be able to get insurance coverage at all, shielding taxpayers from having to support these schools in the first place.
The best way to serve students is not to give more closed school holidays. Rather, policymakers should strive to make these rejections unnecessary. When school trips occur, it means that students have not been able to complete their studies after their school has closed. We should regard this as a failure.
But with the right incentives, schools can maximize their students’ chances of graduating, even if the school closes in the middle of their studies. An insurance mandate for higher education can provide these incentives, while protecting taxpayers.