Skin in the game: Fixing higher education’s student debt problem

Imagine a drug company selling a pill that promises to make you smarter and more capable. It costs $200,000, requires four years of regular doses, and is usually bought with borrowed money. 

The catch? 

If it doesn’t work – if you end up no smarter or more capable – you still have to pay back every penny. 

And the company keeps selling it.

What I’ve just described is not a drug company but how today’s colleges & universities operate.

What’s interesting isn’t that this system is broken. What’s interesting is that we’re surprised it’s broken. 

We’ve created a market where sellers face no consequences for failure and buyers can’t discharge their debt through bankruptcy. 

Incentives drive behavior, and so we’re seeing bad incentives drive bad outcomes.

I offer a remedy below, but first, let’s look at just how our colleges and students are doing. 

A look at college “achievement”

The Education Data Initiative reports $1.73 trillion of student debt as of 2023. The rapid climb in student debt clearly illustrates America’s universities have become phenomenal dealers of debt – that these institutions are not not about enlightenment; but about enrichment.

Theirs, not yours.

• In 2008, the average student debt balance stood at $18,200. For the class of 2023, it stood at $37,100 per student. – a 104% increase in 16 years. Adding insult to injury, per Bloomberg, 1/5 of federal student loan recipients also borrow on their credit cards. 

• Only 41% of college students graduate within 4 years, yet colleges face no consequences for low completion rates. 64% graduate from 4 year programs in 6 years as the figure below highlights. [1]

• And of those graduates, 4 in 10 graduates are underemployed in their first job – meaning they work in jobs that don’t require a college degree, i.e. barista, retail, restaurant server, etc. [2][3]

• And finally, despite skyrocketing tuition (increased 180% from 1998 to 2020), only 60% of college graduates feel their education was worth the cost.[4] [5]

We’re churning out millions of graduates with no discernible skills and drowning them in debt. 

All of this evidences a system that’s fundamentally broken.

At the same time, none of those measures are the real problem.

They are symptoms of a deeper dysfunction: colleges have no skin in the game.

If a drug company’s treatment didn’t work, they’d face lawsuits, recalls and FDA scrutiny. But when a college’s “treatment” fails, they just cash the checks and recruit the next batch of patients students.

A Better Medicine

The solution is surprisingly simple: make student loans dischargeable in bankruptcy and require universities to underwrite loans making them eat 80% of defaults.

Critics will claim this is radical. 

It is not. 

It’s just basic market discipline. 

The radical thing is our current system where teenagers take on six figures of undischargeable debt based on nonsensical US News & World Report mythology, marketing brochures or which school has the best football team.

Here’s how this plan would work:

Before offering a program, universities would have to ask:

• Will this actually make students more valuable?
• Can the students afford the payments on likely starting salaries?
• Do we have the resources to help struggling students succeed?

These are questions they should have been asking all along.

For vocational programs and community colleges, the same principles apply but with an additional twist: industry partnerships. If employers (local, regional, national) believe in a program enough to help guarantee the loans, that’s a strong signal it has real value to both students and these employers.

Why This Would Work

The beauty of this approach is that it harnesses natural incentives rather than trying to fight them. Universities would suddenly care deeply about things they currently ignore:

• Course quality (because it affects graduate success)
• Career preparation (because it affects loan repayment)
• Student support (because it prevents defaults)
• Cost control (because price affects default risk)

They’d essentially become venture investors in their own students. And like good investors, they’d have to work hard to ensure their investments succeed.

We don’t need elaborate rules about what makes an education “good.” If it doesn’t create enough value to justify its cost, universities will feel the pain directly.

This avoids all the gaming of graduation rates and grade inflation that is rampant today.

The Poor Student Paradox

Critics will argue this hurts poor students most. 

In fact, the opposite is true. 

The current system is what really hurts poor students – encouraging them to take massive undischargeable debt for degrees that often don’t pay off. (See the data here

Under the new system:

• Pell Grants would still reduce costs for low-income students
• Government would back 20% of loans for qualified low-income applicants
• Universities would have direct incentives to ensure poor students succeed
• Bad programs would die before they could hurt more students

The best way to help poor students isn’t to give them easier access to debt. It’s to ensure the education they’re borrowing for is actually valuable.

The Equity Smokescreen

Someone will inevitably attack this proposal using the language of educational equity. They’ll call it exclusionary, claim it creates systemic barriers, and say it rolls back decades of progress in educational access.

This sounds noble but is the classic bread & circuses of education. 

What they’re actually defending is a system that encourages low-income students to take on massive debt for degrees that often don’t create value, then deny them bankruptcy protection if things go wrong.

Some hard numbers explain why the status quo is the real equity problem:

• Default rates for Black students are 3x higher than white students [6]
• First-generation students are twice as likely to drop out with debt but no degree
• For-profit colleges targeting low-income students have the worst outcomes

The uncomfortable truth is that our current system practices a form of predatory inclusion. 

We’ve made college “accessible” by pushing undischargeable debt onto those least able to evaluate the risks or absorb the losses.

That’s not equity. 

It’s exploitation wearing an equity mask.

Real equity means:

• Programs that actually create value
• Universities that have to prove their worth
• Protection when education doesn’t deliver
• Pathways to success, not just access to debt

Critics will say making loans dischargeable and university-backed would reduce access. They’re half right. It would reduce access to bad programs that shouldn’t exist. 

That’s a feature, not a bug.

Take for example for-profit colleges. Brookings Institution highlighted that “74% of first-time, full-time students take out student loans, compared to just 21% at community colleges and 47% in four-year publics” and that “students pay more and benefit less from for-profit education than from education in other sectors.” 

My proposed fix would drive the most predatory programs and value-less programs to close first. 

These are the programs targeting disadvantaged students with false promises would fail fastest. Good programs that actually create value would remain accessible, now with universities genuinely invested in student success.

Sometimes the most inequitable thing you can do is perpetuate a broken system in the name of equity.

What Critics Miss

“This will cause mass bankruptcies” 

The interesting thing about this argument is that it undermines itself. If critics are right that many students would need bankruptcy protection, isn’t that proof the current system is selling something worthless?

Critics breathlessly will talk about moral hazard warning of alumni discharging debt even when they can pay. Evidence suggests otherwise. When student loans were dischargeable pre-1976, default rates were lower than today. And of course, bankruptcy would decimate the credit rating of the individual so it is not a costless or riskless endeavor for the debt holder.  

“Universities will only admit wealthy students” 

This fundamentally misunderstands how markets work. The schools that thrive will be the ones that get good at identifying and developing talent, not the ones that only bet on sure things.

Just going after the wealthy is an untenable strategy as there are just not enough wealthy students to fill the nation’s colleges.

American Council of Education highlights 43.1% of all undergrads were low income in 2015-16 and that trend has only accelerated (see earlier comments on predatory programs).

If colleges just focused on attracting the wealthy, we’d see 40-50% of schools shutter due to low enrollment – a trend that has already started.

“This will kill liberal arts education” 

Good liberal arts programs create real value and would survive. 

This will also reduce the cost of liberal arts education broadly given degrees with limited employment prospects will have to reprice themselves. . 

As can be seen below, underemployment tends to be a prominent feature of many liberal arts degrees (performance arts, art history, fine arts, etc).

And so in a market-driven way, this change will force bad degree programs adapt & improve or die. 

The Real Cost

Every year we delay, another cohort of teenagers takes on massive debt for an education of questionable value. We tell them it’s an investment in their future, but we’ve designed a system where only the student bears the risk.

The strangest thing is that we’ve convinced ourselves this is normal.

It is not.

In no other market do we let sellers keep the money even when their product fails and actually pay them more every year for the privilege of buying their ineffective product.

The solution isn’t complex regulations or bigger subsidies. 

It’s making universities care – really care – about whether their students succeed.

Sometimes the best way to fix a system isn’t to add more rules, but to align incentives so natural forces push everyone toward better outcomes. That’s what making student loans dischargeable and university-underwritten would do.

The best medicine often tastes bitter at first. But unlike the college pill we’re selling now, at least we know it would work.

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Also, I’d welcome your feedback, data, ideas and suggestions to strengthen or even challenge this solution. We need more people not just talking about this but getting to solutions at the foundational level. Please leave a comment or hit me up directly at anands [at] gmail [dot] com.

The change/fix I’ve proposed above will have positive downstream impacts on secondary education in the country as well – an area in need of massive improvement. I will write a separate essay detailing those impacts.

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Sources / References:

[1] National Center for Education Statistics. (2022). Undergraduate Retention and Graduation Rates. https://nces.ed.gov/programs/coe/indicator/ctr 

[2] Education Data Initiative. (2023). Student Loan Debt Statistics. https://educationdata.org/student-loan-debt-statistics 

[3] Federal Reserve Bank of New York. (2020). The Labor Market for Recent College Graduates. https://www.newyorkfed.org/research/college-labor-market/college-labor-market_underemployment_rates.html 

[4] Strada Education Network. (2020). Public Viewpoint: COVID-19 Work and Education Survey. https://www.stradaeducation.org/wp-content/uploads/2020/12/Report-December-21-2020.pdf 

[5] National Center for Education Statistics. (2021). Digest of Education Statistics, Table 330.10. https://nces.ed.gov/programs/digest/d21/tables/dt21_330.10.asp

[6] Federal Reserve Bank of Richmond. “Black-White Differences in Student Loan Default Rates Among College Graduates” https://www.richmondfed.org/publications/research/economic_brief/2023/eb_23-12