Reponse to Risk Sharing

AACS GRC Submits Responses To Senate HELP Committee Chairman Lamar Alexander

On Monday, March 23, 2015, Senate Health, Education, Labor, and Pension Committee Chairman released three staff white papers and requested feedback from the higher education community on issues related to the pending reauthorization of the Higher Education Act.  The issues – Accreditation, (Institutional) Risk Sharing, and Data Collection and Consumer Information, were couched in the form of "Concepts and Proposals" that the HELP Committee were likely to be considering, based upon proposals already introduced or being discussed from both sides of the political spectrum (Democrats, as well as the GOP).

Interested and affected parties – including students, parents and others interested in higher education – were given until last Friday, April 24, 2015 to submit their comments and recommendations, which, as noted by Chairman Alexander, "will be considered during the bipartisan reauthorization process that Senator (Patty) Murray and I will be developing."

Wasting little time the AACS Government Relations Committee began its evaluation of the three white papers, discussed general positions in relation to our overarching 2015 HEA Reauthorization "CARE" Recommendations, and set out to complete the development of responses on behalf of our students and schools.  Ad hoc meetings and a series of conference call resulted in three rather lengthy responses which we are proud to share with you below.

We hope that you will take the time to review our efforts on your behalf, and provide us with your input, as deliberations on these issues are just beginning, and there is always time to revise and extend our remarks as the HEA Reauthorization process moves forward.  And moving forward it is!

On Tuesday, April 28th, Senate HELP Committee Chairman Alexander announced his intent to host a Full Committee Hearing entitled, "Reauthorizing the Higher Education Act: The Role of Consumer Information in College Choice" next Wednesday, May 6th. One and possibly as many as two panels of witnesses will be called upon to discuss in greater detail their views on the information outlined in the "Federal Postsecondary Data Transparency and Consumer Information" white paper – with determinations of who will be asked to testify still yet to be determined.

While AACS does not expect to be called upon in this instance, we are prepared to do so if called upon.  If not, Chairman Alexander, Ranking Member Murray, and the HELP Committee at the very least have our community's comments and recommendations to refer to. 

Your GRC will be monitoring the hearing upon our return home from the AACS Spring Executive Retreat and will be providing you with a summary of the hearing and the key takeaways in relation to our response.  Stay tuned and we hope to see you this weekend in Phoenix!

The American Association of Cosmetology Schools'

Reaction and Response to

Chairman Lamar Alexander's

Risk Sharing: Concepts and Proposals White Paper



The American Association of Cosmetology Schools (AACS) would like to begin by thanking Senate Health, Education, Labor and Pension Committee Chairman Alexander for challenging the higher education community to provide feedback on this, and the other two, HEA Reauthorization White Papers.

AACS has chosen to reproduce this particular White Paper in its entirety so that we could provide "AACS' Response" to both the problems and issues which the White Paper use as the basis for consideration of new approaches, as well as the new concepts themselves.  

In so doing, it is our goal to first share AACS member schools' views regarding several perceived areas of  "misalignments in incentives among institutions, taxpayers, and the federal government" and, second,  the need to address these concerns as part of the pending reauthorization.

We then go on to share our memberships' perspective on the new conceptual approaches, with specific reactions and responses to each discussed as well building whenever possible on AACS' 2015 HEA Reauthorization Recommendations and our always fluid CARE Initiative.

AACS looks forward to continuing to work with the Chairman and the rest of the HELP Committee in the exploration of this and other critical issues to be considered as part of the pending reauthorization of the Higher Education Act.


Risk-Sharing / Skin-in-the-Game

Concepts and Proposals

Goal: Realign and improve federal incentives so that colleges and universities have a stronger vested interest and more responsibility in reducing excessive student borrowing and prioritizing higher levels of student success and completion.

Strategy: Design market-based accountability policies that require all colleges and universities to share in the risk of lending to student borrowers.

AACS' Response

As previously stated, AACS applauds Chairman Alexander for challenging the higher education community to address problems with the current student lending system and exploration of potential new ways in which institutions could be called upon to share a greater portion of the risk associated with lending to student borrowers.

We believe that any such discussion must begin with the recognition and acknowledgment that the greatest determining factor in valuing risk within student loan repayment are the demographic characteristics, academic experience, and elementary and secondary attainment levels of the individuals seeking admission into the institution and program that best meets their individual postsecondary goals and objectives.

AACS basis for this fundamental premise are the countless reports and analysis conducted over decades of research that clearly substantiate the cause and effect of borrowing habits and repayment potential of individuals from lower socio-economic backgrounds and limited elementary and secondary educational experience.

Relying on this premise, AACS' primary concerns and objection with this White Paper, its noted areas of problems, issues for consideration, and potential new approaches, is our belief that we do not see adequate recognition of this reality – as well as other considerable institutional risk already inherent in administration and delivery of education with the use of federal funds – appropriately included in the contemplation of institutional risk sharing/skin-in-the-game concepts and proposals.

Thus, throughout the entire discussion, a discussion we do believe is needed and necessary, we will repeatedly be calling upon Chairman Alexander and the HELP Committee take into consideration these realities. 

The same way we are being challenged to look at these proposals, we will challenge the Chairman and the HELP Committee to keep the "law of  unintended consequences" clearly in mind as we all engage in this dialogue.

And urge that we all balance the  need to reform student borrowing, repayment, and the role of the institutions in this process with the recognition of the harm we believe could come to both students and institutions if many of these proposals are enacted.

In our response to each area we will attempt to provide constructive dialogue and recommendations for your consideration and remain committed to working together on a path forward.

Problems That Need to Be Addressed:

In fiscal year 2015, the federal government will provide approximately $138 billion in financial aid, in the form of grants and loans, to help millions of students finance the cost of college. Students face few eligibility hurdles in accessing this federal money. Borrowers must only possess a Social Security number, be a U.S. citizen and either 1) have earned a high school diploma or 2) passed an equivalency exam such as the General Educational Development (GED) test. The U.S. Department of Education does not maintain any underwriting standards for undergraduate loan programs and for the most part, the same amount of loan money is available to students regardless of their program of study or financial need.

AACS' Response

AACS notes the absence in the outline of student eligibility criteria on the previous page of borrowers' ability to establish eligibility through "eligible career pathways programs". 

Admittedly, this revision to the HEA, partially restoring student financial aid access to a very narrow group of students  enrolled in adult educational programs who do not possess a high school diploma, GED or its equivalency, is recent. 

However, we believe it to be highly illustrative of both the fundamental premise and concern previously noted in this response regarding student risk. And, provides justification for resolution of two concerns AACS has previously shared with the HELP Committee in our comprehensive list of HEA Reauthorization Recommendations.   

Career Pathways – A Blessing or a Curse?

As enacted, the current "eligible career pathways" program, championed by Ranking Member Murray, promotes student access through a process that provides entrée for a new – albeit very limited – subset of individuals enrolled in adult education programs, without a HS diploma, GED or equivalency.

AACS believes that such a revision to the law was needed and is a positive step towards restoring access for a whole population of students – formerly known as ability-to-benefit students.  We support the criteria which serve as the gateway to eligibility for adult learners who must either successfully pass a test demonstrating their likelihood of having the proficiency to advance in the program, or limiting access to federal student financial assistance until the student successfully completes the first six semester credits (or the equivalent number of clock hours or quarter credit hours).

It is undeniable that institutions who are willing to take a chance on these students are exposing themselves to additional risk as it relates to their admissions, outcomes, and future loan repayments – all forms of assessment of educational quality and eligibility to administer federal student financial assistance in one form or another. 

But those institutions located in states where such programs exist (more on that below) and who choose to participate in this program are presently willing to take that risk.  And do so willingly because despite the research that suggests that these students will:

  • Require additional services in order to complete their program;
  • Be twice as likely to withdrawal as their more affluent counterparts; and
  • Less likely to begin or complete the loan repayment process – resulting in adverse consequences for the student borrower and the institution;

they still choose to accept them because the potential benefits for success of these students is so significant and life altering.

And therefore, we believe that  it is honest to question, if one or more of the proposals contemplated in this White Paper were added to the mix – would these institutions still be willing to accept the risks?

Sadly, AACS believes the answer to this question for a growing number of institutions that even have the opportunity to contemplate such a hard decisions would be forced to say no.  Resulting once again in reduced access for these important student populations.

We find it very hard to believe that Congress and the champions of this proposal would be pleased to learn that the net effect of efforts to restore this provision – following four years of advocacy - could produce less than anticipated results for those adult learners located in states and attending institutions fortunate enough to even provide the opportunity.

But What About All the Students Career Pathways Does Not  Cover?

From our memberships perspective, we call this omission to your attention in relation to the underpinning of this and other proposals as it relates to equity in the development of any revisions to HEA.  We also vigorously support the emphasis in the Strategy objective above that any policies developed must be equally applied to all institutions of higher education.

To that end, we urge your recognition and consideration of the inequity in the recent adoption of the "eligible career pathways" alternative – which only provides renewed access for adult learners in approximately a dozen states and limits this access to only adult learners receiving services typically provided almost exclusively by community colleges and/or state and local workforce investment operations.

We are therefore requesting, in the name of equity and similar treatment of all institutions of higher education that Congress restore access for students across the country who do not have a HS diploma, GED or its equivalency. 

Or, at the very least that Congress separate the six semester credit hour provisions out as a stand alone provision which would enable all students to have access to federal student financial assistance restored.

We note that this provision is truly one that promotes "skin-in-the-game" on behalf of both the student and the institution.  Both parties must show a commitment to the pursuit of higher education – without access to federal grants or loans – before eligibility and access are granted.

For this reason, it is our hope that this proposal will receive Senator Alexander's support and be included in the development of the HELP Committee's base bill.

This federal investment in access is important and has helped nearly two-thirds of students who rely on federal aid to attend the college or university of their choice. Students can choose from among more than 6,000 diverse accredited colleges and universities that participate in federal student aid programs. Colleges and universities compete for these students and the federal student loans and grants that follow them.

While this system of choice and competition has worked well, and remains a hallmark of the success of our American higher education system, there may be some unintended consequences of coupling universal access with generous, easy-to-obtain government financing. This may have helped create an environment of over-borrowing and pricing that is becoming increasingly disconnected from a student’s ability to repay. Current federal incentives reward colleges and universities for volume (number of students enrolled and associated loan and grant monies) yet federal policy has few, if any, consequences for institutions that leave students with mountains of student debt and defaulted loans.

Federal policy should not shift away from a focus on ensuring access, but taxpayers and other federal actors do have a reasonable expectation that institutions of higher education maintain a greater stake in, or are better aligned with, their students’ success, debt and ability to repay.

AACS' Response

We urge Senator Alexander and the HELP Committee not to lose sight of the number of ways in which institutions are already assuming substantial risk – which we reiterate appears may be undervalued  in the context of this White Paper and its presentation of alternative proposals.

Many of these come in the form of academic barriers which require the devotion of considerable additional resources.  Resources as previously noted for additional support services, remediation, and development of programs, policies and procedures, teaching modalities that emphasize attendance and completion, as well as placement services and initiatives in our unique case to ensure that the student has the ability to pursue their license examination in a timely fashion.

All of these are existing risk factors that schools already assume, and once again, all lead directly to various forms of legislative and regulatory oversight which are used to determine an institution's eligibility to administer and participate in the federal student financial aid programs.

Later in our response, we will provide recommendations of how these existing measures and criteria may provide a more effective path to addressing the problems and issues presented.

The following may represent some examples of misalignments in incentives among institutions, taxpayers and the federal government, and as a result, are potential issues to be addressed in the upcoming reauthorization of the Higher Education Act:

  • Generous cost of attendance policies can allow for significant student debt unrelated to tuition and fees: According to a recent audit of eight schools by the Department of Education Inspector General, on average, tuition, fees, and books accounted for just 42 percent of the cost of attendance for full-time students. Nearly 60 percent of the remaining costs consisted of transportation, room and board and miscellaneous personal expenses. In 2011-12, 68 percent of all undergraduate borrowers took out the maximum amount of annual federal loans permitted under law. At the same time, approximately 25 percent of student borrowers took out loans that exceeded annual tuition (after factoring grants) by $2,500 or more.

AACS' Response

AACS agrees with the premise that students have the ability to take on significant, and arguably excessive, amounts of  debt beyond that which is necessary for tuition, fees, books and supplies, and other academically-related expenses.

However, it is our assertion that it is the HEA itself, and the requirements contained within the statute that force institutions to promote all existing forms of student loan options, that play a huge role in irresponsible student borrowing behavior and excessive, over-borrowing by students.

AACS member institutions routinely speak of the frustrations they have with a lending system that:

  • requires the disclosure of all forms of loan options available;
  • limits their ability to educate and reinforce the differences between grant assistance and loan assistance and the virtues of responsible student borrowing;
  • provides only limited capabilities to prevent students from over-borrowing; which,
  • in return holds them accountable for the actions of borrowers (be they graduates or withdrawals) well after their separation from the school; and
  • with little to no recognition of how external variables that have absolutely nothing to do with the effectiveness of the institution to provide them with an education – which in the case of the majority of AACS member schools and programs requires successful passage of a licensure exam in order to enter the occupation – can effect those result.

To that end, AACS strongly supports and urges the inclusion of the provision contained in S. 85 – The Repay Act, which grants institutions the authority to limit over-borrowing.  However, we believe that in addition to this important provisions inclusion in the Committee's reauthorization bill, that additional tools to promote responsible borrowing should also be considered.

Proposals could include granting the authority for schools to set lower limits for certain broad categories of students, such as by program, dependency status, living arrangement, enrollment status, or other parameters and recommendations presented by the National Association of Student Financial Aid Administrators and/or other alternatives which AACS has developed for discussion based upon our unique characteristics.

  • Some institutions have high cohort default rates: While federal law establishes default rate thresholds for participation in federal student aid programs, some institutions continually have high default rates. The national three-year default rate for all colleges and universities is 13.7 percent. Using the most recent Department of Education data, more than 1,800 colleges have default rates above 15 percent and nearly one out of every three borrowers defaulted on their federal student loans at more than 200 colleges.

AACS' Response

AACS has always contended that cohort default rates are not an assessment of educational quality and should not be used as such.

Moreover, as noted consistently throughout this response, it is our belief that CDRs and other statutory and regulatory metrics to be discussed later (e.g. 90/10 and gainful employment) are nothing more than crude instruments that bases risk on the population served.

  • Taxpayers and students bear the burden and consequences of default: Approximately 7 million borrowers currently hold $99 billion in defaulted federal student loans.  According to analysis from the New America Foundation, the average dollar amount of the defaulted student loan is not an insignificant amount, averaging over $14,000.  Borrowers who default on their federal student loan face damaged credit ratings with consequences for purchasing a car or a home, and wage and tax refund garnishment.

AACS' Response

While it is undeniable that taxpayers and students bear the burden and consequences of default, so too do the institutions themselves. 

And it is our view that, before contemplating most, if not all of the proposals outlined below, we would first request that Senator Alexander and the HELP Committee seek to reform the Federal Direct Student Loan system itself, and the problems with the Department's servicing and collection activities repeatedly highlighted in Office of the Inspector General and Government Accountability Office reports before considering any new burdens on institutions.

  • Some institutions have low student completion rates: Just over a half of undergraduate students complete any degree or certificate within 6 years. Additionally, many student borrowers who drop out often end up in default. Approximately 70 percent of borrowers who default on their loans withdrew from college before completing their program.

AACS' Response

AACS member institutions takes great pride in our student performance measures, which include not only completion rates, but also the primary focus of our unique sector of the higher education community – institutions preparing students for licensure required for entry into the occupation.


Current Law is Conflicting, Arbitrary and Complex:

Colleges and universities assert that they are responsible for providing a quality education to their students who, as with any customers in a free market, are able to take their money elsewhere if unsatisfied. But federal policy that provides taxpayer-backed grants and loans to all students, and rewards institutions for enrollment, may not account for unintended consequences and negative incentives.

A number of federal policy provisions currently exist to address any negative incentives – including institutional cohort default rates, the 90/10 rule, the gainful employment regulation, and other federal requirements.

However, these policies generally are not well-focused, represent top-down government mandates, and are enormously complex in design and implementation. Some policies only focus on a certain sector of institutions instead of holding all schools to the same standards.

AACS' Response

AACS appreciates Senator Alexander's recognition of just some of the reasons we believe the current law is in fact conflicting, arbitrary, and complex.  And we applaud the Senator and the White Paper for recognizing the various ways in which our sector of the higher education community is singled out for differential and  detrimental treatment under both the statute and the regulations.

However, we are frustrated and concerned that on  one hand the White Paper appears to recognize, acknowledge, and even provide justification for their repeal, the overall tone of the document appears to suggest not only these policies remain, but also that they be supplemented with additional proposals.

Our hope remains that under Chairman Alexander's leadership, we can explore ways in which to eliminate some of these regulations, and work collectively on repeal of regulations that arbitrarily single out the private, for-profit community, specific institutions and or programs, and/or those which are overly burdensome, complex and unnecessary – replacing them with potentially new proposals applied equally to all institutions.

We hope that our comments in the sections ahead will help to amplify our true desire to work with Chairman Alexander and the HELP Committee on alternatives.  However, the primary goals and objectives of AACS' HEA Reauthorization Recommendations has been and remain the repeal of the Department's gainful employment regulations, elimination of the 90/10 rule, and modifications to the servicing within the Federal Direct Loan program.

Cohort default rates, the percentage of a college’s federal student loan borrowers who default on their loans within three years of entering repayment, ensure that only institutions whose former borrowers are able to repay their loans can continue to participate in the federal student aid programs. Colleges and universities with default rates that exceed 30 percent over three years or 40 percent in one year risk becoming ineligible for continued participation in the federal student aid programs.

This mechanism may not be particularly effective. In the Department of Education’s most recent announcement of cohort default rates, using the fiscal year 2011 cohort, only 21 institutions – out of approximately 6,000 institutions – were sanctioned for rates that exceeded federal thresholds.  Even then, institutions facing a potential loss of institutional eligibility in Title IV programs are afforded a generous appeals process that results in minimal consequences. The number of institutions actually kicked out of the federal student aid program is shockingly small. According to the Congressional Research Service, just 11 colleges and universities since 1999 have ever been removed from the Title IV student aid programs because of high cohort default rates.

A recent article in The Economist argues that the binary outcome of cohort default rate thresholds is particularly ineffective in altering institutional behavior:

“[Universities] already have some incentive to ensure their alumni do not crash and burn: if a university’s student-loan default rates rise beyond 25%, then its students no longer have access to federally backed loans. This nuclear threat has been effective against the most egregious offenders, but until colleges approach that threshold, there is little reason for them to steer students in more remunerative directions.”

Even more concerning, Department of Education enforcement of cohort default rates is uneven and inconsistent. Recently, officials at the office of Federal Student Aid unilaterally “adjusted” downward the default rates of certain institutions facing loss of Title IV eligibility, thereby keeping them qualified for continued participation in the federal programs. There have been allegations that some institutions may manipulate cohort default rates by pushing students into deferment and forbearance repayments plans that effectively keep borrowers from defaulting during the three-year window of measurement.

Those colleges and universities at which nearly one in three borrowers default on their federal loans escape any serious consequences and are given little incentive to lower tuition, reduce student debt, or increase program performance. These findings raise serious concerns about the efficacy of cohort default rates as currently constructed.

AACS' Response

AACS again requests that Chairman Alexander and the HELP Committee take into consideration the risk associated with the population served and the Department has attempted to do most recently in providing limited relief to only a portion of the higher education community.

We question why the Department would selectively apply the formula to only institutions outside of the private for-profit community – once again highlighting policies and proposals inconsistent with the notion that all institutions should be treated alike  and singling out our community in ways which are unfair and counterproductive to the collective efforts to explore new, more efficient and effective proposals.

This inequity resulted in letter and inquiries from Congress and the community requesting justification for the revisions, requests that to the best of our knowledge remain unanswered by Department officials.

Furthermore, AACS once again takes considerable issue with the false and misleading allegations which have been perpetuated for far too long regarding any institution's or the sector's ability to manipulate CDRs. 

The time has come for Chairman Alexander and the HELP Committee to set the record straight on this issue and make it clear that if any such practices existed between institutions and private lenders in the FFEL, these decisions to grant student loan deferments or forbearances now reside solely with the U.S. Department of Education and its subcontractors – not the institutions.

In fact, the argument could be made that under the current FDSL program, where the Department and its subcontractors control decisions regarding not only the payment options a borrower has available, but also whether or not a student is eligible for and receives a deferment or forbearance, that it is the federal government who has the authority to make decisions which could positively or negatively impact an institution's CDR.

The 90/10 rule, which applies only to for-profit institutions, also does not result in appropriate institutional risk in Title IV programs. The rule requires proprietary institutions to derive at least 10 percent of their institutional revenues from non-federal student aid programs. Some argue that the basic premise of 90/10 is to ensure that taxpayers do not fully subsidize programs that do not have a need for, or cannot attract, private, non-federal financing. Instead, 90/10 actually creates an artificial floor for tuition at these institutions. Because of the increase in Pell Grants and high federal student loan limits, for-profit institutions argue 90/10 creates a perverse incentive where they must raise their tuition in order to generate revenue that is not counted as federal funds.

AACS' Response

The Chairman accurately articulates just some of the problems associated with the 90/10 rule.  There are many other problems that we will refrain from including in an effort to prevent  making a lengthy response even longer.

Suffice it to say we are confident that the Chairman and the HELP Committee are aware of all of the reasons AACS continues to call for the elimination of this provision.  We would like to remind the Chairman and the Committee that the Department of Education is previously on the record in calling for the elimination of the provision or conversely have previously supported the application to all institutions if it were to remain.The gainful employment regulation additionally falls short of creating an appropriate mechanism for holding colleges accountable. The regulation’s stated objective is to ensure that only college and university programs that leave students with “affordable” levels of debt in relation to their earnings, defined at an 8 percent debt-to-income metric, can continue to participate in federal student aid programs.  This approach, however, relies on arbitrary and elaborate government definitions of what is a manageable amount of student debt—definitions that fail to take into account the evidence of non-repayment or failure to meet obligations (default).

Many of these and other “accountability” mechanisms have in fact become cost drivers for institutions of higher education. The gainful employment regulation alone will cost institutions untold millions of dollars and require an additional 7 million hours of staff time to comply.  Burdensome and conflicting reporting requirements require institutions to hire additional compliance staff to report information that is rarely used by consumers to make decisions about college enrollment.

AACS' Response

The Chairman once again crystallizes the rationale for repealing the Department's arbitrary and capricious attempts to impose metrics of  student loan repayment as a measure of educational quality. 

As previously stated in many other portions of this response, AACS believes this approach fails to take into consideration a myriad of variables that can impact borrowers' ability to repay their loans, to say nothing of the basic realization that ultimately it is an individual responsibility. 

Likewise, we are counting on the Chairman and the HELP Committee to abolish the regulation in the base bill, and willing to work with Committee members and their staff on more appropriate forms of federal protections on the investment in students and the institutions and programs they attend.

New Approaches – Risk-Sharing and Skin-in-the-Game:

Instead of blunt government regulations and policies that are complex and conflicting, federal law should provide colleges and universities participating in the federal aid programs with market-oriented systems that enable these institutions to lower student borrowing yet still be held accountable for financial risks to students and taxpayers. This new set of policies may be considered risk-sharing or skin-in-the-game.

Under these proposals, the risk of enrolling a student would be shared among all those who finance a student’s education: the student, the federal government, and now, the institution.

This would ensure that colleges and universities have a clear financial stake in their students’ success, debt, and ability to repay their taxpayer-subsidized student loans. It would encourage colleges and universities to establish appropriate admissions practices for at-risk or uncommitted students, motivate students to complete more quickly, and graduate students with less debt. Skin- in-the-game policies could also incentivize colleges and universities to be more thoughtful about creating free “trial programs” for at-risk populations needing remediation or seemingly uncommitted students who may benefit from limited borrowing opportunities. It is worth repeating: approximately 70 percent of borrowers who defaulted on their loans withdrew from college before completing their program. Institutions can minimize their risk by deploying more resources into academic or other support services to drive on-time completion, success, and ultimately repayment of loans.

With 6,000 diverse institutions of higher education, a one-size-fits-all approach to skin-in-the- game would be inappropriate and inflexible. Federal law should be designed to allow institutions to maximize financial accountability that works with their own individual mission, while still ensuring to students and taxpayers that  risk is being shared.

AACS' Response

While AACS remains willing to explore ways to repeal overly-burdensome and problematic provisions in the statute and regulations, we must confess our apprehension with the new approaches contemplated throughout the remainder of this White Paper.

Moreover, we continue to emphasize that any consideration of proposals in this area must give adequate consideration to the population served, and are appropriately calibrated based upon recognition of the risk factors of the most needy students and the institutions acceptance of and benefits to these more complex borrower populations.

While AACS has:

  • Commended the Chairman and other members of the HELP Committee for recognizing the need to provide institutions with greater flexibility in limiting irresponsible and excessive student borrowing;
  • Offered our support for initiatives akin to the "free trial period" concept, and  promoted similar concepts as a reasonable alternative to the new "eligible career pathways programs" provisions; and
  • Detailed our support for the use of outcomes in assessing quality,

we are still having an exceptionally hard time comprehending how attempts to go beyond these types of initiatives will prove more effective in reducing cost, student debt, and federal accountability.

We believe that the various proposals will ultimately be problematic to implement and may cause problems equal to or greater than the statutory and regulatory revisions they seek to replace if not carefully thought out and implemented with caution over a considerable period of time.

At a minimum, before rushing to develop new alternatives which will place even greater burden on institutions,  AACS urges the Chairman and the HELP Committee to first seek reforms to the current FDSL system, assess how those reforms will impact the need to consider these concepts, and then act accordingly.

Having noted our general concern, we seek to provide commentary to help inform the discussions and promote those options that we find the least objectionable and while highlighting those which are the most problematic as well.


Structuring a federal policy mechanism for risk-sharing can take many shapes, sizes and pathways. The following are general concepts that some have proposed as ways to construct a legislative framework:

Repayment of Federal Student Loans: Colleges and universities assume a liability based on some factor related to their former students’ repayment of federal student loans.

Current and historical commentary on skin-in-the-game concepts and proposals often revolves around this idea. Former U.S. Secretary of Education Bill Bennett writes in a recent book of skin-in-the-game as a solution through which each college pays “a fee for every one of its students who defaults on a student loan, or have a 10 to 20 percent equity stake in each loan that originates at its school.”  The Economist recently wrote that “If [universities] were made liable for a slice of unpaid student debts—say 10% or 20% of the total—they would have more skin in the game.”  Support for this type of skin-in-the-game comes from a variety of higher education observers across the political spectrum from the right-of-center American Enterprise Institute and the U.S. Chamber of Commerce to the Institute for Higher Education Policy.

It is also important to note that the Higher Education Act already establishes a skin-in-the-game concept based on repayment of loans. For example, as a condition of institutional eligibility for federal student loans, foreign nursing schools are required to:

“reimburse the Secretary for the cost of any loan defaults for current and former students included in the calculation of the institution's cohort default rate during the previous fiscal year.”

Recent legislation sponsored by Senators Reed (D-RI), Durbin (D-IL), and Warren (D-MA) would expand this concept to some U.S. colleges that have high borrowing rates and high student loan default rates.

There are many pathways and options to deliberate when utilizing federal student loan repayment as a framework for skin-in-the-game. Listed below are some organizing principles and choices for consideration:

Participation (what colleges and universities would be subject to risk-sharing):

1)      All colleges and universities that participate in federal student aid programs would be subject to risk-sharing;

2)      Colleges and universities with borrowing rates above 50 percent would be subject;

3)      Colleges and universities with borrower-based default rates above 15 percent would be subject; or

4)      Colleges and universities with borrower-based default rates above the national default rate from the previous year, or a similar “norm-referenced” rate would be subject.

AACS' Response

Of the four participation options, AACS believes that the only equitable option would be to apply this framework to all institutions of higher education that participate in the federal student financial aid programs. 

All three of the other alternatives would establish limits that go against the stated Strategy of the White Paper that all institutions should share in the risk associated with student borrowing.

In addition, each of the three alternative options would establish a de facto rating system(s) – rewarding institutions based upon arbitrary cut offs similar to those opposed by many Members of Congress.

AACS also suggests that the three alternatives could actually result in efforts on the part of institutions to further limit student access and promote new forms of CDR manipulation.

And, in conclusion, we reiterate our fundamental premise that as proposed the participation levels provide no recognition of the population served.

Metric (what instrument are colleges held to):

1)      Cohort default rates (percentage of borrowers who defaulted within three years);

2)      Dollar-based cohort default rates (percentage of dollars in default); or

3)      Loan repayment rate (percentage of borrowers who are current and paying principal balance on their loans).

AACS' Response

AACS believes that a strong case can be made that any effort to apply risk sharing on institutions must be focused on the fiscal exposure to the borrowers, the programs, the federal government, and the taxpayer.  Thus, AACS recommends that option two – dollar-based cohort default rates (the percentage of dollars in default) would be the most effective metric to apply for purposes of assigning risk.

While AACS does not have the complete data to substantiate our views, we believe that even anecdotal efforts to focus institutional risk or eligibility on the amount of dollars in default, as opposed to students is default, will significantly modify the perception of where the federal government's and the taxpayers' student debt problem and the huge amount of outstanding federal dollars that go unpaid truly resides.

As previously noted, we would urge any such program to be implemented over a period of time long enough to enable proposals designed to promote responsible borrowing to take effect and gain traction before applying such a proposal. 

Threshold/Trigger (what triggers an institution’s liability):

1)      Any default by a former student loan borrower;

2)      Sliding scale on borrower-based default rate (0-10 percent; 10-15 percent; 15-20 percent; 20-25 percent; 25-30 percent; 30 percent-plus);

3)      Borrower-based default rates above the national default rate from the previous year (13.7 percent), or similar “norm-referenced” rate; or

4)      Loan repayment rate below 50 percent.

AACS' Response

AACS opposes all four of these proposed thresholds, and recommends instead a modified version of option two based upon a sliding scale of aggregate dollars in default with thresholds tied to the average debt burden of students. 

Incentives could be considered for institutions that  have  student debt averages below the national average and liabilities would be assessed on a graduated scale based upon student debt above the national average.

Here too, AACS would require the application of risk evaluation based upon the population served, and could also see this augmented with the use of some other form or sliding default rate and/or completion scale.

Liability (what is the impact on colleges and universities):

1)      Penalty Payment: College and universities would remit a portion of defaulted student loan dollars to the Department of Education:

  1. Sliding scale of payment based on dollar amount of defaulted student loan dollars in a cohort.
  2. Fifty percent of dollar amount of defaulted student loan dollars in a cohort.

2)      Institutional Sanction: Colleges and universities would face a Department of Education sanction:

  1. Limit growth on enrollment or the amount of federal student aid awarded based on the previous year’s total.
  2. Lose access to a portion of other federal funds.
  3. Other sanctions/restrictions on colleges and universities.

AACS' Response

Continuing AACS' assertion that risk sharing must be based upon dollars in default, option one "a." would be the most reasonable.

AACS opposes option one "b." and option two because in one fashion or another they would:

  • Place the institution at odds with their ability to meet other federal student financial aid regulations, including but not limited to the ability for institutions to meet their financial responsibility ratios under option one "a.";
  • Penalize future students and the institution for the borrowing habits and the default patterns of prior students – and potentially penalize both before allowing other reforms proposed to take effect and make an impact, unless a transition period is included;
  • Harm institution's ability to limit future student borrowing and indebtedness by removing portions of other federal funds as contemplated in two"b" – this would be counter-intuitive to the goal of reducing student debt if the programs being contemplated for the reductions were grant assistance programs et. al.; and
  • Most disconcerting would be the ambiguity associated with the recommendations that may be contemplated under two "c." – which could either open up negotiations on other sanctions like those AACS has requested for elimination and/or be left open to regulatory interpretation by the Department.  The latter would be contrary to recommendations detailed in the Federal Postsecondary Data Transparency and Consumer Information White Paper, which AACS supports.

There may be other ways or variations in designing a skin-in-the-game framework:

Loan Guarantees on Completion/Retention: Colleges and universities would guarantee a percentage of the loan amount for current students.

For example, some countries have established loan programs through which the college is responsible for a decreasing share of the loan amount as students progress through their degrees.

To illustrate, colleges could be responsible for 90 percent of the capital plus interest of the loan for a student’s first year, up to 70 percent for the second year and 60 percent for the third year and beyond.

AACS' Response

AACS finds it hard to comprehend how such a proposal would be applied equitably across different types of institutions, with varying program lengths, etc.

Cost Structure: Colleges and universities assume different liabilities based on the loan amount associated with some portion of an institution’s cost of attendance.

For example, since a school’s primary responsibility is to teach and educate students, the school would assume some responsibility of loan debt accrued from just institutional tuition and fees.


AACS' Response

AACS is intrigued by this concept, and would be willing to discuss further exploration of the merits of such a proposal, but again we find it hard to comprehend how such a proposal would be applied equitably across all institutions of higher education.

Federal Student Aid Insurance Fund: Colleges and universities would pay a yearly premium into an insurance fund based on a percentage of the institution’s previous year’s volume of federal financial aid – Pell grants and federal student loans – and other risk factors such as student withdrawals and non-completions. This up-front payment would increase or decrease each year based on a variety of risk factors.

Other colleges and universities are embracing student loan insurance programs, not necessarily for accountability purposes, but to increase admissions yield and strengthen their appeal to prospective students. For example, Adrian College in Michigan recently started a program called AdrianPlus that reimburses a graduate’s loan payments if he or she doesn’t graduate with a job earning at least $37,000 a year. Programs like AdrianPlus could be restructured and reexamined to see if insurance fund concepts merit an appropriate federal policy for institutional skin-in-the-game.

AACS' Response

This particular proposal comes the closest of any to applying the risk adjustment based upon population served and other key criteria, and we believe is the most worthy of all of the new approached for further consideration.

However, we again call into question the implications for such a program to adversely affect other key statutory and regulatory criteria such as the financial responsibility ratios.

Nevertheless, we would welcome the opportunity to explore this new approach with Chairman Alexander and the HELP Committee, but only in the proper context – which must include inclusion of many of the other reforms detailed in this response.


Other Principles and Questions to Consider:

  • Colleges and universities lack authority and tools to manage student debt levels. Federal student aid acts as an entitlement and recipients are entitled to their full amount of federal student aid money, regardless of whether all of the money is needed for educational expenses.

AACS' Response

As discussed more thoroughly in prior portions of this response, AACS urges Chairman Alexander and the HELP Committee to consider and adopt a range of new options to assist schools in the promotion of responsible borrowing and limits on over-borrowing.

  • Accountability provisions or new policies related to skin-in-the-game or risk-sharing cannot be constructed in a vacuum and must be conditioned upon examination of other provisions in current law.

AACS' Response

AACS agrees with this principle and believe we have provided a number of concrete recommendations on other provisions in law that must be examined prior to the development and implementation of any new approach to include institutional risk sharing.

  • Unintended consequences must be examined to ensure that institutions do not tighten admission standards in a way that leads to the admission of only students who the institution expects to succeed or are at low risk of default, dropout, or failure. Policy proposals that incent institutions to enroll these at-risk students and provide incentives, whether monetary or regulatory relief, should be considered.

AACS' Response

AACS believes that this is the biggest concern and challenge which must be considered before taking any steps toward the new approaches detailed in this White Paper and we urge Chairman Alexander and the HELP Committee to proceed with caution – if we are to precede at all.

  • Skin-in-the-game proposals that utilize repayment of federal student loans may not necessarily take into account challenging labor markets and business cycles that are outside of an institution’s control.

AACS' Response

AACS concurs with Chairman Alexander's observations, and again suggests that efforts to legislate in this area may be unwise, and even unnecessary, if and when other legislative reforms are taken into consideration.