When the government extends a loan to students, the risk that students will be unable to repay the loan falls on borrowers and taxpayers. However, colleges reap benefits from student loans without bearing much of the risk. This reduces their incentives to keep costs low, offer effective career services, and steer students toward financially rewarding programs, hurting students. The One Big Beautiful Bill Act makes the worst-performing college programs (based on the typical salaries of graduates) ineligible for direct student loans. But further reforms are merited.

Colleges should be responsible for a portion of the financial consequences when student loans are not repaid in full. They should be required to reimburse the federal government for a percentage of its costs when they have relatively large shares of borrowers who do not repay their loans. This risk sharing could be applied at the program level within schools. Revenues could be redirected to high-quality schools enrolling a relatively large share of Pell Grant recipients.