NCPA - National Center for Policy Analysis

Giving Colleges Some "Skin in the Game"

February 7, 2012

Among the many reforms brought into place by the Dodd-Frank Act of 2010 was the concept of "skin in the game" for mortgage originators -- an idea exemplified by the Mortgage Partnership Finance (MPF) mortgages of the Federal Home Loan Banks.  MPFs force the originator of the loan, usually the banks, to accept a loss should the loan fail to be repaid as opposed to being covered by some sort of government guarantee, says Alex J. Pollock, a resident fellow at the American Enterprise Institute.

While the areas of home finance and student loans may seem unrelated, there are parallels.

  • Both home ownership and higher education were promoted by the government to excess through the overexpansion of debt to levels beyond the repayment ability of a large percentage of borrowers.
  • The government demonstrated its support for these goods by guaranteeing much of the credit, transferring the risk from the originator to the taxpayer.
  • In both cases, the government's actions had the end result of driving prices, of homes and a college education, to unprecedented and unsustainable heights.

Following this series of similarities and recognizing the solution put forth to the problems in mortgage financing, it stands to reason that a similar program would be of use in the area of student loans.  For example, if colleges were forced to maintain a 10 percent first-loss share in the credit performance of the loan, their incentives to charge reasonable tuition would be strengthened.  Such a move would relegate them to a credit position junior to that of taxpayers and would give them the "skin in the game" necessary to arrest the growth of a potential student loans bubble.

Source: Alex J. Pollock, "Fixing Student Loans: Let's Give Colleges Some 'Skin in the Game,'" The American, January 26, 2012.

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