Much of what's wrong with student loans can be fixed by making colleges -- instead of the government -- the direct lender to students.
Compare getting a car loan to a student loan. Ford benefits when you buy its product, a car, and will lend you the money to pay for it. If you don't repay your loan, Ford loses. A college benefits when you buy its product and enroll for classes but then steps out to allow the government to lend you the money.
The incentives for Ford and a college are obviously quite different. Ford must borrow the money it lends to customers in the market. Colleges, on the other hand, get free money from the government and therefore have little incentive to keep prices low. Colleges just shrug and say, "It's the government's problem if students default." Not surprisingly, tuitions have risen 500 percent over the past decade, as discussed in my last HuffPost blog.
We need to guide our colleges back to reality by making them responsible for the loans they benefit from. They will have to rethink their tuition strategies once they are responsible for collecting the loans. Most student borrowers are not meeting their payment obligations. As lenders, colleges will have to lower tuitions or face mounting bad debts. They will have to teach basic finance to students, as they will have a huge stake in creating responsible borrowers. Students should be tested to ensure they understand the obligations they are assuming, from the very first dollar they borrow.
Many colleges already make loans directly to students. They have sophisticated finance departments capable of administering a lending operation. Smaller colleges could create lending consortiums to operate more efficiently. No doubt colleges would also use the collection agencies now employed by the government to track down students in default.
College lending must remain true to the original purpose of student loans, which is to achieve educational equality. For this to happen, the government must make credit lines available to colleges for relending to students. Concessionary terms, such as low interest rates and first loss guarantees, will permit colleges to make affordable loans to low-income students. None of these measures should diminish the primary responsibility of colleges to repay the government.
But whether we should even make large loans to low-income students is a legitimate question. Aren't grants more realistic? After all, the student loan system is devolving into a de facto grant system, as more and more loans go unpaid. But as long as loans are part of financial aid, colleges should grant them. It's time for colleges to take the oars from the government and brave the financial aid seas to help keep student borrowers afloat.