Close Close

Financial Planning > College Planning > Student Loan Debt

Should colleges be held to a fiduciary standard?

Your article was successfully shared with the contacts you provided.

Do you think there’s a student debt problem? If so, you’re not alone. In fact, it’s fast becoming an issue… for retirement saving!

It’s hard to both pay off loans and save for retirement when you’ve got the cash flow of a 24 year-old with a Bachelor of Arts in English Literature (or most any other non-STEM related field).

Six years after the depths of the recession, many college grads continue to have a hard time landing their feet on the first rung of their chosen career ladder.

Yet many have found a way to both pay off those pesky loans and save for retirement (for some usual – and unusual ways – to do this, read “Tips on How to Both Save for Retirement and Pay Off Student Loans,”, November 3, 2015).

Is there a way to head this problem off at the pass? Is there a way to reduce student loans?

Some feel college should be free. That sounds nice, but how would professors eat?

Some feel government should pay for college, but those people tend to live in controlled economies and experience a lower standard of living than Americans.

There is one common view, though, and that’s this is a really hard problem to solve.

Or is it?

Look, we’re all pretty familiar with the financial industry, right?

Why not apply some capitalist know-how towards finding the solution.

Better yet, let’s apply the fiduciary standard.

Let’s look at aligning incentives and avoiding conflicts-of-interest.

Currently, colleges can maximize the amount of students accepted based on the capacity of pre-existing marginal costs. Not considering university granted scholarships, this action will maximize revenues.

If students can’t afford the total cost, they must either obtain loans for not matriculate. In the former case, the college receives the revenue without risk.

In the latter case, the college simply picks the next person on the waiting list.

In the present scenario, colleges can raise rates with minimal downside, as long as the supply of applicants continues unabated.

If the student defaults on the loan, the college still keeps the revenue that loan brought in. The student earns a poor credit rating.

The college? It continues to take in more students, with more loans, ad infinitum.

What does this suggest how their interests are aligned?

Are they working in the best interests of their customers (i.e., the students) or themselves?

Clearly, the outcome of this arrangement is a continuing escalation of student debt.

That’s the status quo. That’s what we want to change.

But how?

Let’s require colleges to act as fiduciaries. Let’s require them to always act in the best interest of the students (at least when it comes to financing their education, not when it comes to academic rigor).

Students can still rely on third-party loans, but, under this collegiate fiduciary standard, all colleges would be required to be the only co-signer on those loans. In this manner, if the student defaults, the college is on the hook to repay the loan.

Do you think colleges would take a greater interest in making sure their graduates obtain jobs with reasonable income potential? Is that in the best interest of the students?

And now we know just how powerful a fiduciary standard can be.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.