How to Protect Taxpayers from the Fallout of College Closures

Last month, Hampshire College, a small liberal arts college in western Massachusetts, announced it would shut down. Hampshire’s financial troubles, coupled with declining enrollment, eventually made closure the only option. Unfortunately, the school is not alone. Overall college enrollment has fallen by a fifth since 2010, and federal stimulus funds from the Covid era have dried up. One recent projection estimates that over a quarter of private colleges are at risk of shuttering their doors. Students can suffer when colleges close. Some students can transfer their credits and complete their degrees elsewhere. Hampshire, for instance, has done the right thing and set up defined transfer pathways with nearby institutions. But many closed schools fail to strike such deals with other colleges, leaving students to scramble for a pathway to continue their education. Some drop out of their degree programs altogether. For these students, getting their financial investment in college back is often arduous if not impossible. Students who take out federal student loans and then see their colleges shutter can turn to federal programs like Closed School Discharge (CSD) and Borrower Defense to Repayment (BDR). Under CSD, students may have their federal loans discharged if they were enrolled at the time of closure or withdrew from their institution within 180 days, and do not complete their degree programs elsewhere. Under BDR, borrowers who can prove they were harmed by being misled, lied to, or defrauded by their institution may also have their loans forgiven. These programs are a valuable part of the constellation of consumer protection measures available, but in their present form, they have cost the government billions of dollars. Taxpayers shouldn’t bear the costs of making students whole when their institution closes or engages in fraud; institutions should. To ensure that funds are available to protect students when colleges close, the federal government can look to an innovation from the states: the tuition recovery fund. Twenty-two states require certain higher education institutions to pay into a state fund, typically, a small fraction of the tuition they receive. If colleges close, students can file a request for tuition reimbursement from that fund. In a recent report , we analyzed statutes and administrative codes across all 50 states to understand how these funds operate—and how the federal government could heed lessons from these funds to create a national version that will ensure colleges, not taxpayers, bear the costs of operating the student loan safety net. States with Student Tuition Recovery Funds A federal tuition recovery fund drawing on the states’ model would levy a fee on every private institution, calculated as a small percentage of new federal student loan volume at private institutions. This ensures that colleges which make more intensive use of federal loans—and thus present greater risk to taxpayers should they close—bear more of the cost of filling the fund. We calculate that an average fee of $1.50 per $100 of new loan volume would raise $9.5 billion over the next 12 years, enough to cover the costs of loan discharges in all but the most catastrophic of mass college closure scenarios. The federal government could also charge higher fees for schools at risk of closure, based on factors like high loan default rates or rapidly declining enrollment, ensuring that healthy colleges do not subsidize their insolvent counterparts. This plan would not create a new student entitlement or loan forgiveness program. Students have access to Closed School Discharges and Borrower Defense to Repayment today; our plan would not expand these programs in any way. Rather, a federal tuition recovery fund would simply ensure that taxpayers aren’t left holding the bag for liabilities that institutions created. Of course, a federal tuition recovery fund should be just one part of a broader plan to protect consumers at a time of major transition in higher education. Improving price transparency for students, tying federal and state funding to earnings outcomes, and expanding high-return workforce education should also help students earn valuable credentials from institutions that will not close suddenly. As more colleges face closures, a federal tuition recovery fund would solidify protections for students and shift the financial burden of this protection away from the federal Treasury. The government may not be able to prevent closures—nor should it—but it can ensure that closures are not ruinous for students or taxpayers. The post How to Protect Taxpayers from the Fallout of College Closures appeared first on American Enterprise Institute - AEI .