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Under a new accountability measure recently proposed as part of a larger House budget bill, colleges would have to pay millions of dollars each year to reimburse the government for their students’ unpaid loans.

The plan builds on an idea—known as risk-sharing—that lawmakers and policy analysts have been toying with since at least 2015. As the federal student loan portfolio grew, the goal was to require colleges to have some skin in the game and incentivize them to improve student outcomes.

And while the concept has gained some bipartisan support in theory, higher education institutions have repeatedly argued that it is difficult to create a fair accountability system when many of the variables involved are out of an institution’s control and depend on the decisions of individual students and borrowers.

So far, the higher ed lobby has successfully defeated proposed risk-sharing plans such as the one included in a Republican bill from the last Congress, known as the College Cost Reduction Act. But now, an almost identical proposal is back and at the heart of House Republicans’ plan to cut at least $330 billion from higher education programs over the next 10 years. The overall legislation, which aims to cut $1.5 trillion from the budget, could receive a vote on the House floor this week, though some lawmakers have threatened to block the measure amid concerns that it doesn’t include deeper cuts. Even if the bill fails, it serves as a marker of what House Republicans hope to accomplish moving forward.

Many higher education policy experts warn that practically speaking, the latest risk-sharing plan relies on a complicated formula that’s essentially a black box. Released in late April, the proposal has not been tested enough to know its ramifications, they say, and the limited data available is inconclusive. Some analyses released by conservative groups say the program will be a financial boost for efficient public institutions and penalize bloated private ones. But one study conducted by a lobbying group suggests that public regional and minority-serving institutions that serve high populations of low-income students will get hit the hardest.

“Fundamentally it’s an astonishing level of federal overreach to essentially lump in all institutions of higher education together—public, private, for-profit—and run a convoluted formula to determine winners and losers at the federal level and then redistribute funding,” said Craig Lindwarm, senior vice president of government affairs for the Association of Public and Land-grant Universities.

Democratic politicians also argue that the purpose of the legislation is not truly to hold colleges accountable for student outcomes like graduation rates and income levels, but to crack down on what the government considers overly liberal institutions and fund President Donald Trump’s priorities.

Even some conservative supporters acknowledge that it’s difficult to know the full scope of the bill’s potential impact this early. But they say risk-sharing is a necessary tool to penalize colleges that provide a poor return on investment and ensure the production of a well-prepared, financially stable workforce. They also suggest that the incentives such as additional grant funding to institutions that keep costs low and graduation rates high will offset the penalty for most public institutions.

“With any policy change, we’re not going to be able to predict in advance 100 percent of how this is going to affect everyone, everywhere, all the time. But I don’t think that should be an excuse to not make policy changes,” said Preston Cooper, a senior fellow at the conservative think tank the American Enterprise Institute. “I still think the data we have gives us a general idea of which sorts of institutions would be affected and the magnitudes of the penalties involved.”

So How Does It Work?

The proposed risk-sharing plan would kick in for new loans starting in July 2027, said an aide for Republicans on the House Education and the Workforce Committee. That means colleges wouldn’t be penalized for disruptions to the student loan system that occurred during the pandemic or efforts during the Biden and Trump administrations to overhaul repayment.

If we don’t even understand how this works, why the heck are we passing it? I mean, it’s a concept, but I don’t think it’s the concept that people think it is.”

Jason Delisle, nonresident senior fellow at the Urban Institute

And because borrowers don’t have to start paying back their loans until six months after they graduate or stop out, institutions likely won’t have to pay a penalty until 2029 or 2030 at the earliest, the aide added.

But from then on, institutional payments would be calculated annually—major by major—for each new cohort of borrowers and would continue until they’ve paid off their loans. The amount per cohort could change from year to year, depending on factors such as borrower behavior, postgraduation earnings and college costs. But it’s expected to grow as more and more cohorts are added to the lump sum.

Under the bill, the amount per cohort would be calculated using a three-part formula, which is largely unchanged from what Republicans proposed last Congress in the CCRA.

The first step is to determine a college’s risk-sharing liability, which is how much each institution owes the government. To do that, the formula looks at the difference between how much students were supposed to repay during a given year and how much they actually did. The calculation takes into account the value of any missed or partial payments as well as any interest that the government waived or principal contributions it matched, the committee aide said. It does not, however, include debt waived through programs like Public Service Loan Forgiveness, which was a concern for institutions.

This is the part of the formula that raises the most questions for institutions, as the mechanics of exactly how the risk-sharing liability is calculated are not clearly outlined in the legislation or in a CCRA database published by the education committee Republicans in 2024. And even if it were, much of the data needed to run the formula is not publicly accessible.

“How the formula works is the million-dollar question, and something that we’ve been trying to work on for a year and a half,” one policy expert said. “It’s very complicated and relies on metrics that aren’t publicly available.”

House committee aides counter that colleges have access to student borrower data via the National Student Loan Data System, which can be used to predict future risk-sharing payments. They also point to a recent Dear Colleague letter reminding colleges of their responsibility to monitor borrower payments.

But even then, higher ed lobbyists say, it’s not clear who will be responsible for calculating the liability. If any part of that responsibility falls to campus financial aid administrators, higher ed groups say the plan will increase the administrative burden on colleges.

“If I were a lobbyist, I would just say to all of my members, go to your congressman and say, ‘We don’t know what this does,’” said Jason Delisle, a policy analyst who has worked at think tanks across the political spectrum but is now based at Urban Institute where he’s a nonresident senior fellow. “If we don’t even understand how this works, why the heck are we passing it? I mean, it’s a concept, but I don’t think it’s the concept that people think it is.”

Incentives to Lower Costs

Once that risk-sharing liability is known, the next step in the formula is to figure out how much of that liability fee a college will have to pay. That’s done using what the legislation calls an earning-price ratio, which compares students’ earnings to the federal poverty line and college cost. A higher EPR means a lower final payment. For example, if an institution’s EPR is 0.3, or 30 percent, then it has to pay 70 percent of the original liability.

To further offset the risk-sharing penalty, colleges can also qualify for a new pot of funding proposed in the bill called the PROMISE Grant, which is the third step of the formula. How much a college would get in PROMISE funding depends on the total value of Pell Grants received and the graduation rate of Pell-eligible students. This grant is funded by other colleges’ risk-sharing payments.

So, according to data from the House committee, the State Technical College of Missouri should get $3,230,130.50 in PROMISE grants. But the community college would have to pay $9,688, bringing its net gain down to $3,220,442.50. Washington University in St. Louis, however, would receive no PROMISE Grant funding and lose about $3.5 million. (The House Committee data only lists the final risk-sharing payment—not original liability values or EPRs.)

In theory, this data demonstrates how the EPR and the PROMISE Grant are supposed to support colleges that serve low-income students, but many higher ed lobbyists are worried the program will actually do the opposite. That’s largely because colleges can only receive a PROMISE Grant if they agree to lock in tuition rates for each new freshman class. If they can keep tuition costs low, then their EPR scores will only be strong. Some lobbyists say that neither is a feasible option for public colleges and minority-serving institutions, which rely heavily on funding from the state.

“It’s not a coincidence that some of our schools that would get hit the hardest are in states that invest very little in public higher education. Some of our schools in Pennsylvania and Arizona, for example, would fare extremely poorly, and it’s by and large because tuition levels are such a determinative component as it relates to the penalty assessment,” said MacGregor Obergfell, director of governmental affairs at APLU. “To think of what traditional conservative orthodoxy is, it seems pretty unusual that a conservative position is using the federal government to punish state institutions for decisions made by their states.”

Reward or Penalty?

Some higher ed groups also noted that much of the formula either depends on or fails to acknowledge factors outside of a college’s control. Much of this has to do with unpredictable borrower behavior, but there are other factors at play, too; for example, when calculating discounts with the EPR, the formula doesn’t account for differences in the cost of living from college to college.

“Institutions in higher-cost areas are at more of a disadvantage than other institutions,” said Karen McCarthy, vice president of public policy and federal relations for the National Association of Student Financial Aid Administrators. “They have to charge higher prices to reflect higher costs of labor, maintaining facilities and all those types of things.”

The burden of risk-sharing payments may be so high that colleges elect to opt out of the federal student loans program entirely, she added: “Ultimately it would have an impact on lower-income students who have a need both for a Pell Grant and a direct loan to help them meet their cost of attendance.”

Of colleges that enrolled 70 percent or more low-income, Pell-eligible students, 96 percent would have to pay a risk-sharing penalty and 91 percent would lose money over all when PROMISE Grant is factored in, according to the American Council on Education’s analysis of the House data.

The committee countered that finding with its own analysis of the data, sent to Inside Higher Ed, showing how colleges that enroll the highest share of low-income students should see about $99 more per student, while those that enroll the lowest share would lose about $66 per student.

The ACE analysis as well as the committee’s data are among the few studies that show the estimated impact of the previously proposed risk-sharing plan. None have been updated yet to reflect the latest iteration.

Another analysis from Cooper, the AEI fellow, estimated that public institutions as a whole should get more money under the plan, but private nonprofits are expected to face a substantial penalty.

Although critics point to how the plan would affect individual institutions, particularly small, underresourced schools, proponents argue that the focus should be on the impact to higher education over all, and that colleges can lower their costs to see a payoff.

“Because the net gains are significantly larger, the sector as a whole sees a net gain even though more institutions have net losses,” Cooper said. “So, the upside for institutions here is that there are significant rewards available to those which can improve their outcomes.”

At the end of the day, it’s all about how you choose to look at the data.

“I would just like to see [the formula of risk-sharing] play out for a couple of hypothetical colleges based on data that has some bearing on reality,” said Delisle from Urban Institute. “And that’s a hard thing to come by right now.”