OPINION: Major Issues: Re-assessing student loan interest rates for non-stem majors

Erick Murrer, opinion columnist for the College Heights Herald

Erick Murrer


It’s no secret that Governor Matt Bevin has heavily scrutinized the merits of Arts and Humanities programs in an era of state budget cuts.

Most recently, Bevin exclaimed, “If you’re studying interpretive dance, God bless you, but there’s not a lot of jobs right now in America looking for people with that as a skill set.”

In part, his sentiment arises from the notion that non-STEM majors are less lucrative than STEM majors.

Student loan debt can’t be written off and has a negative, long-term impact on credit. Within the Commonwealth, student loan debt totals an outstanding balance of $14.5 billion (or $23,916 of loan debt per borrower).

But STEM graduates have higher initial disposable incomes and can pay off student loans more readily.

Bevin commented that public Kentucky colleges and universities are, “maintaining something that’s not an asset of any value,” by investing in non-STEM majors, and are, “ … not helping to produce that 21st century educated workforce.”

According to the 2016 report “Student Loan Default and Repayment in Kentucky”, one’s choice of major “moderately” plays a role in predicting a student’s likelihood to default. Are uniform federal student loan rates, which do not assign risk to one’s degree, responsible for subsidizing less-than-optimal outcomes?

The University of Kentucky and Murray State University, two public schools which possess the highest share of STEM graduates with loan debt in Kentucky, exhibit the highest loan repayment rates. Alternatively, WKU has a smaller proportion of STEM graduates reflecting lower repayment rates.

Eager to understand the federal loan market in relation to efficiently determining risk, I interviewed WKU’s own economics professor Brian Strow, a proponent of assigning risk to student loans as related to one’s major.

Given the understanding that loan default rates are higher for non-STEM majors, I asked Strow why he thinks student loan interest rates are uniform. Strow believes this is attributed to a debate surrounding “fairness.”

When assessing the federal student loan market, Strow argues that STEM students subsidize non-STEM fields because, “a market that correctly priced risk would, on the margin, produce more STEM graduates as a percentage of the college population.”

Exploring this concept in greater detail, MIT accounting and finance Professor S.P. Kothari suggests the loan amount the Department of Education lends to students ought to be tied to one’s major. STEM majors constitute less risk, as affirmed by Experian, a credit reporting bureau, because STEM majors are “more likely to be comfortable with their student loan debt, least likely to defer their loans, and least likely to wish they had taken less student loan money.”

In this vein, Strow concurs that a higher default risk should denote higher interest payments.

To gauge the efficacy of modifying loan interest rates to prevent default, Strow suggested that policymakers could “compare the default rates by major under the uniform interest rate regime and compare the default rates by major once interest rates are differentiated.” Assigning risk to college majors is not an unprecedented move, and has been carried out by the private student loan market, Strow noted.

One policy implication from the 2016 report “Student Loan Default and Repayment in Kentucky” called on colleges to adopt “intrusive intervention strategies for at-risk borrowers.”

Assigning risk to loan interest rates as dependent upon college specialization is an answer to this call, incentivizing STEM degrees. I agree with Strow’s view that the adoption of different interest rates for STEM vs. non-STEM majors shouldn’t feed into an “us vs. them” mentality; rather, we need to consider mechanisms which efficiently use taxpayer money.

After re-evaluating the student loan market by accurately designating default risk, those most sensitive to price changes in education would be marginally more likely to elect STEM majors.

Strow holds this situation to be an economic positive: “The more people we can get into STEM education, the faster the economy will grow.”

But keeping all things considered, Governor Bevin did major in East Asian studies, so more discussion is needed to profile the long-term value and return of investment for non-STEM degrees.