Not enough emphasis on reducing student risk

Much of the debate about college today focuses on tuition and mounting student debt, with Democratic presidential candidates even raising the possibility of forgiving all student loans. Not enough attention is paid to risk. Spending tens of thousands of dollars annually on four years of college (or more), with little promise that it will pay off in the form of a good job, is a big gamble.

If higher education is ever going to break the cycle of endless tuition increases matched by ever-increasing student debt, an essential step will be to find innovative alternatives that reduce the risks involved and give colleges an incentive to send graduates into the world with educations that make them coveted by employers. Over the past decade, dozens of colleges across the country - most of them smaller institutions, which are especially vulnerable to declining enrollment and falling revenue - have begun trying alternatives that could help point the way.

Taking a page from the retailing playbook, colleges including Pacific Lutheran University in Washington, Keystone College in Pennsylvania and Houghton College in New York offer their student-customers financial assistance in paying back loans after graduation if a borrower doesn't land solid employment.

Each program is unique, but they generally operate by providing payments to the student borrower to reimburse federal and private student loan payments for as long as the borrower's income stays below a predetermined income threshold. At Pacific Lutheran University, the PLU Pledge provides financial assistance to help borrowers who earn less than $43,000 annually after graduation. Borrowers who make $20,000 or less annually are reimbursed for 100 percent of their student loan payments. As a borrower's income rises toward the $43,000 threshold, the reimbursement rate is reduced. The assistance continues until the borrower's income surpasses $43,000 or until the loans are completely paid off.

About 120 undergraduate programs are now offering such guarantees, according to the Indiana-based LRAP Association (for Loan Repayment Assistance Program), which takes its inspiration from a repayment program at Yale Law School in the 1980s. Colleges pay a flat fee - about $1,300 per student, according to the Wall Street Journal in 2017 - to the LRAP Association to manage their programs and to pay the reimbursements to borrowers who need them. Essentially, the schools are buying insurance.

It isn't hard to imagine how a loan repayment assistance program could sink a small college if enough graduates took them up on the offer, especially during a recession. A financial-services company such as LRAP is better positioned to manage the risk through expertise in actuarial modeling and the ability to pool cash flows across multiple schools.

Another way to reduce students' financial risk is the income-share agreement. Instead of paying tuition upfront, students can opt to delay paying for their education until they're working, with the fee based on their income. Colorado Mountain College, Lackawanna College in Pennsylvania and Norwich University in Vermont are among those offering this innovative option.

Some financial analysts caution that ISAs are unregulated and the details of the agreements - the payback rate in relation to particular income levels, over a specified time period - dictate whether an ISA is a better deal than a regular student loan. But the prospect of not paying for college until you've got a job to pay for it would be appealing to many students, as would the potential escape hatch of paying nothing if you're unable to find a decent job.

Other schools are taking a different approach to quell prospective students' concerns about finding a job after they graduate - by guaranteeing job placement. Thomas College in Maine promises that its graduates will find a job related to their major within six months of graduation. If they don't, the school doesn't refund their tuition dollars but it does offer graduates the option of choosing between having their federal student loan payments covered by the college for up to a year or beginning a master's degree program at no cost, including enrollment in up to six graduate courses.

The movement toward reducing students' financial risk has made only tiny inroads in the behemoth of U.S. higher education, but clearly many colleges - especially smaller ones, which are in particular danger during this era of skyrocketing tuition and student debt - are eager to find an alternative to the current approach.

Critics argue that guaranteeing positive outcomes for students puts an unseemly emphasis on colleges' role in the earnings potential of undergraduate degrees. Agreed - the benefits of education go far beyond the individual financial returns. But the reality is that most students need a financial payoff from their college degrees.

Beth Akers is a senior fellow at the Manhattan Institute and author of the report " Should College Come With a Money-Back Guarantee?"