When Do Students and Taxpayers See a Return?
Optimal Accountability Thresholds in Higher Education
Higher education has come under increased scrutiny in recent years due, in part, to rising costs, a ballooning student debt portfolio at the national level (currently at $1.6 trillion), and countless examples of students struggling with their individual debt burdens. A number of high-profile policy solutions have been proposed to address the oft-mentioned “student debt crisis”, including debt forgiveness, free college, and doubling federal need-based funding such as the Pell grant.
Running parallel to these student-centric proposals are reforms aimed at the institutional side of the market. These range from informational improvements, which aim to provide better data on student outcomes at each school/program, to formally sanctioning institutions whose students appear to receive little value-added from their postsecondary investment. This paper seeks to provide guidance to policymakers regarding this latter set of policy proposals.
There are two main rationales for the government to provide oversight and maintain a system of accountability in the market for higher education: safeguarding taxpayer funds, and protecting the time and monetary investment of students. Given that student loan debt cannot be forgiven through bankruptcy (except in limited circumstances) this second rationale is especially critical, as poor outcomes can financially cripple an individual for years or decades. Policymakers and researchers generally agree that the current accountability system which governs the higher education landscape is inadequate. For example, 709 schools have loan portfolios where fewer than 25 percent of students have made any progress paying down the principal balance on their loans three years after leaving school and entering repayment.
However, there is a disconnect between many in the policy community over what the actual goals of accountability policies should be. One side tends to focus their rhetoric on the protection of taxpayers’ investment in higher education, while others view the chief goal of accountability as a means of consumer (e.g. student) protection. While both goals are certainly laudable, the disconnect can be problematic. Any policy which maximizes student outcomes likely also includes some degree of government subsidization. Similarly, a policy which maximizes taxpayers’ return could harm some share of students through inadequate access to financial capital. Making matters worse, there is no work to my knowledge which attempts to quantify these gains/losses, making it all the more difficult to come to a consensus. This paper attempts to fill that void.
I find the optimal debt-to-earnings threshold to be in the 11-12% range and the optimal repayment rate threshold to be in the 15%-20% range. This is the case regardless of whether the objective is to safeguard taxpayer dollars or to maximize students’ financial outcomes. However, the threshold which maximizes government revenues is much more sensitive to individual modeling decisions, and is considerably higher under even small changes in the assumed discount rate or fraction of tax revenue generated from college education. These results can be interpreted as 1) schools with debt-to-earnings or repayment rates on the wrong side of these benchmarks cost the government more money than they generate in loan repayments and taxes, and 2) these schools leave the average student financially worse off for having attended the institution.
