As unemployment for college students continues to rise and the higher ed bubble nears its unavoidable burst, can anyone reasonably dispute this idea?

Andres Pinter of the Bangor Daily News reports.

Colleges should shoulder some risk of student loans

Recently, student loans have emerged as the most ubiquitous of consumer debts, and the unemployment rate among recent college graduates remains persistently high. All finger-pointing aside as to the underlying causes, these two economic birds could be killed by borrowing one stone from the world of syndicated lending, where interests are often properly aligned.

When a bank agrees to make a loan of a certain size, it often seeks to sell down some of that risk across a lending syndicate. Although the bank — known at this point as the underwriter or syndicator — could sell down the entire loan, at the end of the process it frequently retains a token piece as a sign of faith in the borrower’s credit. The blessing of the underwriters makes the world of big lending spin fairly smoothly.

Consider, then, if colleges were to share with lending institutions and the government some of the credit risk of student borrowing. Much like the way syndicators hold a piece of a loan, colleges should hold pieces of their students’ loans. By doing so, the college would provide its explicit faith in the borrower’s credit and in the likelihood that the loan will eventually be repaid.

Here’s how it would work: A student at X University applies for a loan. Lending institutions perform the perfunctory underwriting with one exception: X University reviews copies of the credit application and must consent before the loan is approved. This system would differ from syndicated lending in that the university would never take full balance-sheet risk and would not itself originate or sell down loans. When the loan is funded, the university would pitch in 2 to 5 percent of the cash lent to the student, not only as a symbolic gesture, but also to give it skin in the game.


 
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