One Way to Fix Students Loans: Mandatory LRAPs

Student loans operate very strangely in this country. A student borrows money from the federal government to pay for higher education expenses—thus, there are three parties involved (the student, the government, and the college or university). But only two of them face any risk from the loan. The student faces severe financial consequences if he defaults, such as a damaged credit score, making it difficult and expensive to get a loan for a house or car. And the government stands to lose a lot of money if the student doesn’t repay (the best estimate right now is that the government loses 24 cents of every dollar it lends). But the school doesn’t face any risk at all. It gets paid up front and keeps all the money, regardless of whether the student defaults or if the government is repaid.

Needless to say, this system gives colleges and universities skewed incentives. Institutions are financially rewarded for offering programs to students who don’t benefit from them. Maybe the program is low quality; maybe the students were too academically unprepared to succeed; or maybe the labor market simply doesn’t compensate the program’s knowledge and skills enough to justify its costs. Any of these should be a giant red flag that warrants phasing out a program, but from the school’s perspective, none of that matters if students are still enrolling. Institutions are rewarded for enrollment, not student success.

Thus, for colleges and universities, student loans are a “heads I win, tails you lose” proposition—they win no matter what. That should change, and one promising idea was pioneered by the schools themselves: Loan Repayment Assistance Programs (LRAPs).

Under LRAPs, an institution essentially offers students insurance for their student loan payments by repaying the loans when the students cannot. For example, if a student owes $300 a month in student loan payments, but can only pay $200, the school pays the remaining $100.

Some colleges and universities are already voluntarily using LRAPs because it allows them to inflate their prices. How can helping students make loan payments end up being a financial boon for the institution? Because of loan forgiveness.

The loan forgiveness provisions in income-driven repayment programs forgive loans after students make payments (based on their income, not their debt) for 10 to 25 years. If the school’s price is high enough, it will gain more from the high level of debt used to pay tuition (most of which is forgiven) than it spends helping students make payments for several years. In other words, a college or university can help a student make several thousand dollars of payments, and, in return, it gets to keep tens or hundreds of thousands of dollars from inflated prices. This strategy works best for high-priced programs with low earnings (relative to debt), like law school. In fact, many law schools offer LRAPs.

[More from Andrew Gillen: “It’s Time to End the Grad PLUS Loan Program”]

One way to fix student loans is to build on the LRAP idea. While current LRAPs are voluntary and shift the cost of forgiven loans to the taxpayer, the new LRAP would be mandatory and require the school to pay for any forgiven student loans. This essentially makes the college or university a co-signer on the loan.

Mandatory LRAPs would have a variety of beneficial effects.

First, they would completely eliminate student loan defaults. Since the institution would have to repay any debt the student doesn’t, there would be no more defaults on student loans.

Second, they would align schools’ incentives with the interests of students and the government. Under the current system, the college or university still wins financially even if the student and the government lose. But under mandatory LRAPs, schools would only win if students and the government win too.

Third, they would lower student loan debt. Right now, institutions face no financial consequences when their students accumulate excessive student loan debt. But under mandatory LRAPs, colleges and universities would be on the hook for that debt, and would therefore restrict student borrowing.

Fourth, they would likely lead to shifts in enrollment patterns. Schools would downsize or close many high-debt / low-earnings programs, while establishing and expanding low-debt / high-earnings programs. This would benefit students by making enrollment less financially risky.

In sum, mandatory Loan Repayment Assistance Programs offer a promising way to fix student loans.

Image: Adobe Stock


6 thoughts on “One Way to Fix Students Loans: Mandatory LRAPs

  1. Not much of a fix. The costs will just be passed along in the form of higher tuition. Or, students who need loans will simply not be admitted. Or more likely, some combination. It’s fun to think that there’s a painless fix, but there’s not.

    As a faculty member, I want to get paid. 100%, not 74%.

    1. “As a faculty member, I want to get paid. 100%, not 74%.”

      If a sentence ever summarized the problems of higher education, this is it.

      The problem is that we have far too many high-priced programs with low earnings (relative to debt), and that a lot of faculty members aren’t even producing the 74% in value added.

      Reality is that tuition simply *can’t* simply continue to rise, BC (Before Covid) there was an average discount rate of 47% and it’s probably higher now. Throw in Fall 2026 when the babies not born in 2008 aren’t showing up on campus and things will get dire.

      Students in the high-priced programs with low earnings likely won’t get loans, and said programs will be forced to either LOWER their tuition or close outright. And the faculty (collectively) will be damn lucky to be paid 74% of what they currently are — this likely will include some combination of pay cuts and layoffs, along with a demand that the remaining faculty work harder (i.e. teach more classes) than they currently are.

      Oh, there’ll be strikes and job actions — and IHEs pushed into bankruptcy liquidation as a result. And after the third, fifth, or perhaps twentieth time this happens, faculty may change their sense of entitlement. Or may not — and become unemployed — and then working at WalMart.

      The days of “I deserve it” and “we’ll just charge the students more” ARE OVER!!!

    2. “As a faculty member, I want to get paid. 100%, not 74%.”

      That thinking is what brought about post-tenure review. Too many tenured faulty who think like that have retired-in-place. Post tenure review is designed to purge them.

      There is a very simple fix to this problem. Close down departments that provide no economic benefit to the graduate. You don’t find many (if any) job openings with the requirement “Bachelors in womens’ studies required; masters preferred.” Same with black studies, or race studies or other woke degree programs that have cropped up in the last 20 years.

      And finally, it is not the government who loses when a student defaults on a loan. It is the taxpayer. Huge difference.

      1. Tell that to your bank when they offer you 74 cents on the dollar. Tell your hairdresser or barber you are only going to pay 74 cents. Good luck!

      2. You are repeating stale talking points that have little to do with the actual realities of current higher education. The vast majority of students are enrolled in workforce training programs, which bear the responsibility for burdening universities with the bloat of additional students who would have gotten their job training in the workforce. Even those that graduate in a so-called “practical” field often have to take on debt anyway and still spend time paying it off. “Woke degree programs” have tiny enrollments to begin with and the source of those agendas in higher education comes overwhelmingly from administrative policies. Vastly more vague, shoddy programs exist under the umbrella of business schools. Humanities and social science departments receive paltry funding and this has been declining since the 1980s.

        University education is not about job training, and the conversion of American universities into workforce education has created the student loan crisis. The problem is more complex not going to be solved by repeating the same talking points neoconservatives have been saying for years.

  2. When the student loan system was first set up in the 1980s, it was based on the model of the 1950s where the student body was mostly male, and they all went into the workforce after graduation. What no one is mentioning about any of this is that higher education is now about 60% female and that women tend to have babies, and they tend to have them when they are in their 20’s and early 30’s.

    What I’ve seen over the years is a lot of quite bright young ladies graduate with professional credentials and licenses, maybe work in their field for a year or two — and then “do the Mommy thing” for 10-15 years. They keep all their licenses and certificates active, earning all the required CEUs and the rest, and then return to the workforce when their youngest child is in school.

    I’ve also seen a lot of quite bright ROTC cadets (not all male) who were commissioned at the O-1 grade upon graduation — and that’s only $43,646 a year.

    As much as I love the idea of a mandatory LARP — and I do — my concern is that we need mothers and we need soldiers and I don’t want to see institutions penalized because their graduates support American values such as motherhood and national defense — doing that would be counterproductive to our national needs and interests.

    I don’t know how to adjust for this, the 2LT issue would be easier to fix because you could have the DoD make the LARP payment, but reality is that we need to have intelligent, well-educated women having babies and raising children. We need these babies to continue our culture — and to fund our retirement programs.

    On the other hand, there are women scheduling their pregnancies so as to benefit from the loan forgiveness plan. There are a variety of ways of doing this, one which comes to immediate mind is to work a few hours a week in a public service job while the children are young, meet the 10 year forgiveness, and then go practice big-bucks corporate law. That’s not what the system was intended to facilitate….

    I don’t have an answer to this — and I *love* the idea of LARP — I only remind people of how we wound up with the current mess of accrediting groups, which were once voluntary associations without punitive powers….

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