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UW-Madison’s Hillman examines ‘risk sharing’ models for federal student aid

December 20, 2016

The Center for American Progress on Monday released a new report titled, “Sharing the Risk: A Plan for Colleges to Participate in the Costs of Student Loan Failure.”

The paper’s summary explains how it “proposes a new vision for institutions to share in the risk of federal student loans. Requiring universities to put skin in the game would give them stronger incentives to design their educational offerings, support services, and financial policies to send borrowers into the wider world with a meaningful chance of success.”

Nicholas Hillman
In addition to “Sharing the Risk,” the Center for American Progress commissioned seven other individuals to construct their own proposals for a federal student loan risk-sharing system. And among those additional proposals is one authored by UW-Madison’s Nicholas Hillman.

Hillman “proposes a system that uses measures of student loan default and non-repayment, each adjusted by the percentage of students at a school who borrow. Institutions would be asked to repay between 5 and 15 percent of the balance of loans received if they had results far outside the norm of similar schools.”

His paper also provides a detailed look at the characteristics of the institutions that would make risk-sharing payments under his system versus other models suggested by members of Congress.

Hillman’s paper is titled, “Designing and Assessing Risk-Sharing Models for Federal Student Aid.”

Hillman is an associate professor with the School of Education's Department of Educational Leadership and Policy Analysis. He also is a faculty affiliate with UW-Madison's La Follette School of Public Affairs, and is a Wisconsin Center for the Advancement of Postsecondary Education (WISCAPE) faculty affiliate.

Hillman studies higher education finance and policy, and his research focuses on how policies affect educational access and success.

In his conclusion, Hillman writes: “By introducing risk-sharing into federal student financial aid policy, students are believed to be better protected against the risks associated with financing college on credit. Risk-sharing is also expected to create incentives for colleges to improve the repayment outcomes of their students. However, incentive-based policies like these are rarely so simple and there are considerable risks to consider when designing and implementing a risk-sharing model. This paper highlights several and identifies areas that might strengthen existing risk-sharing efforts. Nevertheless, policymakers should consider how risk-sharing might increase transaction costs by creating new bureaucratic burdens on colleges. How it might displace colleges’ goals of expanding access in exchange for enrolling students who are most likely to succeed (i.e., least risky) in the first place. Policymakers also should beware of gaming and the possibility that even the best-designed performance metrics might be gamed if not monitored carefully.”

Hillman adds: “Nevertheless, the challenges and opportunities outlined in this paper should help federal policymakers identify promising ways to insure borrowers against risks while also holding colleges more accountable for their loan outcomes.”

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