How To Fix Student Loans—Permanently | Opinion

President Joe Biden's plans to forgive $430 billion in federal student loans faced the scrutiny of the Supreme Court last week. Biden has correctly argued that the student loan program is broken, but his preferred remedy is nothing more than an expensive band-aid. Loan cancellation does not address the underlying problem: too often, the federal government funds education that leaves students financially worse off.

Students who receive such education are then stuck with loans they cannot repay in full. Before the pandemic-era moratorium on student loan payments began, some 11 million borrowers were delinquent or in default on their debts. Political pressure for loan forgiveness has been building, but this pressure tends to be untargeted: doctors and lawyers on track to earn six-figure salaries receive relief alongside those whom higher education failed.

If college pays off, student loan forgiveness should not be necessary. If college does not pay off, we should not fund it with federal loans.

Many of the problems in our student loan system could be solved if the federal government stopped making loans to educational programs without a financial return. The trouble is that the government cannot always determine which programs will pay off. Selectively denying federal loans to certain programs smacks of central planning, which usually ends poorly.

Instead, colleges should be given financial incentives to identify, improve, and occasionally close low-performing programs on their own. The Foundation for Research on Equal Opportunity has released a comprehensive plan to do just that, accompanied by model legislation for Congress to consider.

The core of the foundation's proposal is a requirement that colleges compensate taxpayers when students do not repay their loans in full. If a program's graduates do not earn enough relative to what the college charged, their loan payments will not be sufficient to pay off their debts. If colleges are responsible for a portion of the unpaid balance, programs where earnings are too low or tuition is too high will face penalties.

The compensation requirements can be calculated separately for each program at an institution. Engineering and nursing students are likely to repay their loans in full, but those who major in dance or sociology often cannot afford their debts. Colleges must pay more to compensate taxpayers for losses on loans that funded low-return majors.

Colleges can reduce their liabilities to taxpayers by charging less, working to improve the earnings outcomes of low-value majors, or encouraging students to switch into majors where financial returns justify the cost of tuition. Compensation requirements should be phased in over time to allow colleges to make such adjustments.

If Congress enacts this accountability system, taxpayers will save over $10 billion per year. The plan reinvests part of the savings into additional financial aid for low- and middle-income students who pursue high-return programs and adds a bonus to students' Pell Grants if they choose a major where earnings are high. If a program delivers stronger outcomes, students will get more aid.

There is a valid concern that schools might raise tuition to capture the additional federal aid. But the accountability plan uses a formula that reduces the Pell Grant bonus for schools with higher tuition, so raising prices would be self-defeating.

The Foundation for Research on Equal Opportunity's accountability plan pairs a stick (compensation requirements) with a carrot (Pell Grant bonuses). The two provisions work in concert to encourage schools to offer high-value educational programs at an affordable price.

According to our calculations, most programs which leave students worse off financially would trigger a compensation requirement of more than $5,000 per student. By contrast, most programs which deliver a lifetime return of a quarter million dollars or more would be eligible for a Pell Grant bonus.

The Biden administration's efforts to forgive student loans will add hundreds of billions of dollars to the deficit and do nothing to fix the underlying problem. Without congressional action, taxpayers will continue to fund low-quality education, miring more students in debt they cannot repay. An accountability plan can ensure colleges offer programs that can justify their cost, or else face financial consequences. If colleges want to enjoy unfettered access to federal student aid, they should have to deliver on the economic mobility they promise.

Preston Cooper is a senior fellow in higher education policy at the Foundation for Research on Equal Opportunity.

The views expressed in this article are the writer's own.