A Modest Proposal: 2.0

Earlier I proposed the idea of repossessing credentials for students who default on student loans. This past week, an improvement to this proposal has come to light.

The idea is described by  Michael Simkovi in an excellent Social Science Research Network paper titled “Risk Based Student Loans.”

Without risk-based pricing of student loans, there may be no reliable price signal about the long-term financial risks inherent in different courses of study. This lack of price signals undermines students’ ability to make informed decisions about the course of study that will best balance their innate abilities and individual preferences with postgraduate economic opportunities. Similarly, the lack of price signals may undermine post-secondary educational institutions’ ability to adjust their programs to improve their students’ postgraduate prospects. Misallocation of educational resources is not only harmful to individual students and their families — it could threaten to undermine the productivity and competitiveness of the U.S. labor force and the U.S.’s ability to continue to invest in education and research.

This addresses the front end of the student loan issue. If a particular degree program results in diminished income potential for the graduate, the loan for that degree should have a higher cost. The end result would be fewer loan defaults because fewer students would be interested in paying a premium on a loan for a risky career path. This would provide further incentive for higher education providers to create substantive degree programs if they wish to reduce the barriers to prospective students for obtaining loans to pay for the program.