Should Colleges Pay for Student Loan Defaults?

In an opinion piece for Forbes.com, Daniel L. Bennett of the Center for College Affordability and Productivity offers a remedy forrising student loan default rates:

[H]old colleges accountable for providing a valuable education to their students, by transferring the losses from default and bankruptcy from the public to the colleges themselves, or at least sharing the risk. For too long colleges have received an infusion of taxpayer-provided money in exchange for very little accountability. Let's make all student loans dischargeable in bankruptcy, but instead of the taxpayers taking the hit when student loans go sour, colleges should absorb the loss, or at least a portion of it.

It's a good idea.

Many colleges -- especially for-profit colleges but also more than a few non-profit colleges -- are signing naive students up for levels of loan debt that are destined for failure. Borrowing $100,000 with an interest rate of 10% to pay for an undergraduate degree can almost never lead to a good financial outcome, and yet colleges enroll students with these debt loads all the time. In cases where financial aid offices sign students up for outrageous levels of student loan debt, the schools should at the very least share in the financial fallout.

Under the current system, the school is protected from the financial fallout from the borrowing decisions of their students. This is wrong and it's dangerous. See also: Bubble, Housing.

The Department of Education is set to unveil guidelines that would deprive for-profit colleges of eligibility for federal loan programs if the incomes of a large percentage of graduates are insufficient to finance their student debt loads. As I recently wrote on DailyFinance, that's a good first step -- and it should apply to every single college in America.