By: Mark Kantrowitz and Mark Schneider
May 8, 2012
Interest rates on federal subsidized Stafford loans were cut from 6.8% to 3.4% during the current economic downturn. This "temporary" reduction is scheduled to expire this summer, halfway through an election year. With potentially millions of student votes at stake, President Obama, presumptive Republican nominee Mitt Romney and some members of Congress are racing to support an extension. But as politics triumphs over policy, underlying facts about student loan levels go ignored along with an opportunity to help students make better enrollment and borrowing decisions.
Changes in the interest rates on student loans do not reduce the amounts students borrow. Nor would a one-year extension of the rate save them much. And while stories of students with six-figure debt are legion, the average debt for graduating seniors is around $27,000. Repaid over 10 years,that totals about $330 a month, with only $20 coming from the interest rate increase. Since the average college graduate earns around $42,000 per year, roughly $20,000 more than a high school graduate, this monthly payment--whether $310 or $330 -- is manageable for most students.
The real problem is that students are taking on too much debt, and politicians can help fix that by providing more information about the links between college majors, graduation rates, education debt and employment outcomes. After all, debt is a problem only if students don't graduate or if graduates can't get jobs that pay enough to allow them to repay their loans. Taking on $25,000 in student loans to earn an additional $25,000 per year is a good investment; borrowing $100,000 to earn an additional $5,000 per year is not.
Students need to know both their likely salaries and their likely debt levels at graduation. As a general rule, total student loan debt at graduation should be less than the expected annual starting salary. If it's higher than that, borrowers will struggle to repay their loans. But currently there is not enough data on how many college graduates have debt out of sync with income. Nor are there data for each college on the link between debt and income by undergraduate major. Psychology majors at one college might snag lucrative secure jobs while those at another don't. Only with information on the likely job market outcomes from particular schools and majors can students make informed decisions about where to enroll and how much debt they can manage.
The U.S. Department of Education will soon release data on the ability of students graduating from career and technical programs to repay their student loans. It's a great way to help students determine whether a diploma from a covered program is, on average, a good financial investment. But why not measure the success of students from all programs on all campuses and make the data available in a user-friendly format?
States should follow suit, releasing their own data on how their grads fare in the labor market. Already, many states have matched student-level transcript data with state unemployment insurance records. Made public, the results would allow students, families and policymakers to see salaries by college and major across the state. In the next few months, Virginia and Texas, among other states, will share their linked data with the public. The bipartisan legislation introduced by Senators Ron Wyden and Marco Rubio would ensure all schools and states go this route.
Of course, the other side of making useful and easy-to-understand information about the true costs and benefits of every higher education program available is making sure students and their families have the skills and tools to understand and interpret the data. Financial literacy needs to be taught in secondary schools and colleges specifically to help students make sound education investment decisions and more generally to help tomorrow's citizens better manage money. This is the double-barreled way to end today's sterile posturing over student debt and advance to a more informed discussion of the benefits and costs to students and the country of the various courses of study our colleges and universities offer. This in turn could lead both consumers and policymakers into making better decisions about where to invest their time and money in higher education.