How to fix the Department of Education’s $100 billion 'miscalculation'
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The U.S. Department of Education just got sent to the principal’s office. According to a troubling report recently released by the Government Accounting Office (GAO), the department failed to account for over $100 billion in write-offs. And the expectation is that things will get worse – much worse. Should Congress suspend the secretary’s credit card?

As it turns out, in their rush to ease the college tuition burden on millions of students, the Department of Education (“ED”) failed to adequately budget, track, and report the fiscal impact of so-called Income-Driven Repayment (IDR) and Non-Profit Loan Forgiveness programs designed to reduce required payments by borrowers.

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The report documents a comedy of errors in the federal budgeting process: failure to account for inflation, entire categories of loans (including the popular Grad PLUS loan), and even keep an auditable trail of assumptions. Remarkably, budget estimates also assumed that no new students would opt-in to IDR as the administration campaigned to recruit 2 million additional students into IDR programs. 

In audit terminology, the GAO identified multiple “material weaknesses” in the internal controls of our federal student loan system. The department’s only response to date was a statement that “decisions made…were based on existing staff and systems resources available.” New America Foundation’s Alexander Holt characterized the department’s actions as either “extremely deceitful” or “extremely incompetent.”

The GAO’s findings shouldn’t be a surprise. The Kafkaesque National Student Loan Data System (NSLDS) tracks over 40 million loans with 1980s-era green screen technology. Last year, experts warned that the department oversees “a portfolio of student debt rivaling the entire loan business of JPMorgan Chase with a staff roughly the size of the National Weather Service.”

In August, I predicted that the administration’s various student loan programs could cost as much as $500 billion. The $108 billion uncovered last week will likely be, according the GAO, no more than a down-payment on the total costs of the student lending programs. The GAO report assumes only 24 percent of student borrowers will enter into these highly attractive repayment programs. If borrowers act rationally and opt for IDR, the number will be much higher.

But is income-based repayment the root of the problem? Or, could it be a part of the solution? As it turns out, the answer is both.

Income-Driven Repayment--as conceived by the Obama administration--was a half-measure at best, focused on reducing repayment obligations for students without addressing the growth of tuition and poor student outcomes. Ironically, the intellectual forbearer of income-based repayment was none other than Milton Friedman, who in the 1950s first described a mechanism to connect payment for higher education with income.

Of course, in Friedman’s version, income-based repayment was not merely a tool to manage repayment of federal debt obligations. He imagined a system of income-based repayment at the college and university level with the potential to align the interests of universities with students. Income-based repayment contracts (or as they’re now called, Income Share Agreements) would shift a portion of the cost burden to institutions themselves. If graduates earned enough, over a period of time, colleges would not only recover their investments, they might see a return. If graduates failed to earn, colleges would lose out on valuable receivables.

Income Share Agreements or ISAs have the potential to reformulate the incentives that drive behavior in higher education. What if universities encouraged students to pursue programs of study that produce a strong return on investment and discouraged students from pursuing those that do not? Would market forces encourage institutions to eliminate or redesign low-return programs? Smart universities might think seriously about lowering tuition – a refreshing change after a generation of college costs growing at double the rate of inflation. The government could subsidize ISA obligations for students from low income backgrounds, or those who complete programs in areas of social importance that don’t typically produce high incomes (e.g., education).

If Congress wanted to use income-based repayment to solve college affordability once and for all, it could enact a new 10/90 Rule: requiring all Title IV-eligible colleges and universities to put up 10 cents in ISAs for every 90 cents in federal loans received. Colleges and universities would, for the first time, have skin in the game for every student who relies on federal student loans. The department could design incentives to ensure that the liberal arts remain a strong and vibrant core of the higher education ecosystem. Relatively simple ‘look-back’ regulations would prohibit colleges from increasing tuition by 10 percent and writing off their ISAs.  

To date, the Department of Education has used income-based repayment as blunt policy instrument to lessen the burden of too costly college tuition on borrowers.  We now know that the costs of these programs were not appropriately accounted for.  But it would be a mistake for Congress to think of income-based repayment as a weapon of mass deficit-generation because in the hands of colleges and universities, income-based repayment has the potential to stem ballooning college costs and powerfully align the interests of institutions and students.

Daniel Pianko is Managing Director of University Ventures, a New York based investor that invests in the most transformative companies and entrepreneurs in higher education.


The views expressed by authors are their own and not the views of The Hill.