Student Debt and Higher Education Risk

Abstract

To borrow for college is to take a risk. Indebted students may not earn enough to repay their loans after they graduate or, worse, fail to graduate. For students who cannot pay for college without borrowing, this risk is both a disincentive and a penalty. Greater risk undermines the efficacy of federal financial aid policy that seeks to promote access to higher education. This Article situates education borrowing in the context of a larger, cultural and political trend toward placing risk on individuals, and criticizes this development for its failure to achieve any of the typical goals – such as particular public policy outcomes or prevention of moral hazard – of legislation that allocates risk.

The Article describes dramatic increases in student borrowing and explains the ill-effects of greater reliance on debt, which increases the riskiness of investing in higher education. The Article contends that recognizing that student debt is a mechanism that transfers risk bolsters criticisms of increased borrowing and suggests a consistent way to evaluate aid policy. The Article outlines an insurance regime, the logical response to undesirable or unmanageable risk, that could help preserve access to higher education while at the same time mitigating the downside risk of borrowing for college.