The Unsupportable Cost of Variable Pricing of Student Loans

Table of ContentsI. Introduction 2138II. Of Uncertain Efficacy and Undesirable Effects 2141A. Changes in Interest Rates May Not Affect Borrower Behavior 2142B. Rather than Deterring Borrowers, Higher Interest Rates May Drive Up Rates of Default.......2146C. Predicting Student Outcomes Is Difficult and the Attempt May Result in Unfairness 2149D. There Are Better Ways to Direct Students to Study in Particular Areas-If We Want To 2154III. How Big Is the Problem? 2158A. There Is Weak Evidence of "Mismatch" Between What College Students Study and What Employers Need 2159B. Students' Choices of Major Do Not Determine Likelihood of Student Loan Default 2165IV. Education Is Different 2167A. Lawmakers Have Adopted Policies that Promote Access to Education Generally on the Basis of a Broad View of What Is in the National Interest 2168B. Education Plays a Critical Societal Role 2173C. Education Finance Policy Should Respect Student Autonomy 2177V. Conclusion 2179I. IntroductionA financial aid regime that requires students to shoulder ever more of the cost of higher education represents a decision to treat education more like a consumer investment. Access to credit enables students to meet the rising costs of college; students borrow through federal aid programs and from private lenders. Yet determining the extent to which federal student loans should resemble loans in other contexts is a difficult task. It is also a necessary and important one, and thoughtful proposals that take it on should be welcomed and carefully considered. Michael Simkovic's recent Article in these pages is at once a sophisticated, constructive, and provocative contribution to ongoing debates over how to pay for college.In Risk-Based Student Loans,1 Professor Simkovic addresses the terms of student loans and proposes setting interest rates on federal student loans2 based on the likelihood of repayment: the less likely a student is to have a job paying enough to cover repayment obligations, the higher the interest rate that the student should be required to pay.3 Such loan pricing, used in some other credit markets, imposes a higher cost of borrowing on those who are determined to be more likely to default than those who are less likely to default, compensating lenders more when the risk of losing their money is higher.4Professor Simkovic proposes basing federal student loan interest rates on student choices of major.5 The proposal would impose higher interest rates on loans to students who pursue majors in which past graduates have tended to default on their federal loans at relatively high rates.6 The proposal would charge a lower interest rate to students who pursue majors in which past graduates have defaulted at relatively low rates. While the current system of fixed-rate7 federal loans requires a rational, prospective student borrower to bet that a particular choice of college, major, and career will enable repayment, Professor Simkovic's proposal raises the stakes by imposing a higher interest rate on borrowers who choose majors associated with higher rates of default.8The problem that the proposal would solve, Professor Simkovic writes, "is a large mismatch between the skills workers have and employers' needs . . . [which] contributes to structural unemployment, reduced output, and student loan defaults. …