Perform this thought experiment with me... The vast majority of student loans in the United States are federally backed. There are also $1,000,000,000,000+ in student loans outstanding. This means that, in the event student loans aren't paid, the debt will be borne by the general fund of the United States (read: taxpayers). Should taxpayers demand lower paying majors pay higher student loan rates? Should Art and Psychology Majors pay more for loans?
Teasing Out the Biases
A couple caveats, before we dive in. First, note that any discussion of the earnings of disparate majors is loaded with misleading information.
While Engineers and Math Majors undoubtedly earn more than Art Majors and Psychology Majors and Social Workers as a group, it is likely that STEM Majors (Science, Technology, Engineering and Math) also drop out of the major at a higher clip than Art Majors.
Second, the stats I share are for Bachelor's Degree holders... it ignores the effect of advanced degrees. Let's look at the stats, which are from Georgetown's What's it Worth? The Economic Value of College Majors report, made with information from the 2009 American Community Survey. Enough said, to the charts!
Credit Ratings, Debt Forgiveness, and 'No Credit Score' Loans
In bankruptcy, it's extremely difficult to discharge student loan debt. While this can turn into a form of debt slavery where former students can get trapped under a mountain of student loan debt, it also works to hold down the actual student loan rates charged. Before the law changed there were reports of strategic defaults to discharge student loan debts - convenient in the case of advanced degrees which require a longer time in college attendance. Even though it seems to be an extreme law, it actually does allow lower rates on student loans and more issuers are willing to enter the market if there is no chance of a discharge in bankruptcy.
One issue with issuing student loans is it's a strange market. Issuers are deciding to lend five or more figures to students who often have little or no borrowing history. That means that a concept like a credit score is pretty useless, since a lot of borrowers don't even have a credit score. That doesn't mean there is no way of predicting they can pay back a loan - there is high variability in the salaries for the different majors, and for attendees of different schools (higher rated schools graduate students who earn higher salaries). As I mentioned previously, it is somewhat tempered by the fact that the higher paying majors are generally more competitive and have a higher dropout rate.
So, Should Arts and Psychology Majors Pay Higher Student Loan Rates?
Economically, they should absolutely pay higher rates, in line with the additional risk of not paying off the entire loan. In theory, it's no different than a credit score being used to set rates on other debt.
Note there are two ways to not pay back a student loan:
- One would be to discharge it, and short of a debtor dying or having their school close down, it's a rare one.
- The second one is to have the debt forgiven after 20 years (one of the provisions of the new Executive Order). The new maximum payment on a student loan is 10% of salary (previously, it was 15% of salary and debt was forgiven after 25 years).
Taking these together, it is much more likely that a low salaried profession or a profession with lower job prospects is going to leave some of that loan balance unpaid.
Is this Discussion Heartless?
Well, this was an economic question! Politics is the art of the possible, and the scenario I laid out won't happen considering the huge number of Millennials who will vote out whomever tries to pass such a law. In fact, it is far more likely that the political powers at be will drift towards allowing student loan debt to be discharged in bankruptcy. That will probably be the death knell for the private student loan market, which is already on life support after the provisions in the Patient Protection and Affordable Care Act became law.
I also left out an important point, which I will make now lest I am accused of being obtuse: it costs more money to educate an Engineer (or a Doctor) than an Art or Psychology Major. That's pretty much across the board: lab costs, teacher salaries, infrastructure, and everything else needed to deliver a diploma to your kids. It is much more likely we eventually see some majors cost more than others - so some of the higher paying majors will end up with more debt after all. Isn't it ironic, yet strangely harmonious? Fire away at me in the comments.
And, to appease the Art and Psychology Majors, I leave you with this joke about Business Majors:
"There was a student who was struggling in Engineering. He dropped out and joined the Business School. The GPA at both schools went up."
Should Arts and Psychology Majors pay higher student loan rates?