The Office of Government Accountability (GAO) has released a new report on the process of dropping out of school for federal student loans. When a federally-funded college or university closes its doors, students may be eligible to pay off their debts if they cannot complete their education. Most recently, the Biden administration announced a 1 1.1 billion closed school discharge for borrowers admitted to the ITT Technical Institute, a for-profit college that collapsed abruptly in 2016.

The GAO report focuses on how to streamline closed school dropouts and provide quick relief to borrowers. But policymakers must also focus on one lofty goal: eliminating the need to drop out of school first.

No student goes to college for the purpose of taking a loan, they should be discharged only after one year of school closure. Students go to college to get a degree or certificate and increase their earning potential in the labor market. The government’s closed school policy should be centered around helping students achieve what they originally came for: a credential.

When schools are still closed with enrolled students, they will be able to complete their academic programs through a process called Student Teaching. Alternatively, they can transfer their credit to another college and complete their degree there. Students who use one of these options will not be eligible for closed school discharge, but will receive the credentials they originally wanted.

Theoretically, the federal government can predict when a school is in danger of closing and take action to protect students and taxpayers. These actions may include requesting financial protection from the college to cover the cost of closed school holidays. In addition, the school’s accredited college may motivate the college to plan teaching and arrange for the transfer of credit to other institutions.

But in practice, the government has a surprisingly poor track record of predicting school closures. Department of Education number-crunchers regularly pay clean health bills to schools that are on the verge of collapse. The department’s method of evaluating schools’ financial responsibility was once suggested by hypnotists for a school that is better than Harvard University, which has a fortune of $ 42 billion.

As a result, the Department of Education often waits for action until it is too late. When the Obama administration requested financial protection from ITT Tech, the school was already so deep that no bank was willing to give it a lifeline. The institution closed two weeks later, putting hundreds of thousands of borrowers in trouble. School dropouts continue to be associated with ITT tech failures.

Closing schools in colleges and universities will always be a fact of life. In fact, in higher education some creative destruction is desirable. But the sudden closure of schools, which prevents students from completing their education and the taxpayers holding bags, does not have to be a permanent feature of the higher education system. The GAO found that nearly half of the students attending closed schools did not complete their programs or transfer their credits.

The private sector has often done better than the education department in anticipating school closures. In 2016, according to GAO, private credit rating agencies granted “junk bond” status to 30 for-profit schools that passed their official federal financial exams. Policymakers should take advantage of in-depth institutional knowledge in the private sector and sharp financial incentives so that the department can predict when schools will close.

The solution to this is that schools need to purchase insurance to cover the costs associated with dropping out of school. Each year, the Department of Education will calculate the total potential liability of the taxpayer if the school closes. Schools that rely on federal debt will need to purchase insurance from the private market to fully compensate for those potential losses. If the institution fails and the closed school is dropped, the insurance company makes the taxpayers whole.

The main advantage is that insurance companies can vary the premiums of the institutions according to the financial risk presented by each school. Institutions with a strong financial base will pay lower premiums. Schools with plans for streamlined teaching and other colleges will get leave at their premium to ensure contract transfer. But flight-night organizations may not be able to get insurance coverage, protecting taxpayers from the obligation to put those schools first.

Disclaimer: The views, suggestions, and opinions expressed here are the sole responsibility of the experts. No Economyessential journalist was involved in the writing and production of this article.

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