IN POLITICS as in life, small is easier than big. Small issues, small ideas, and small fights are easier to understand, explain, and exploit. Even when the underlying topic is important, like education, policymakers gravitate toward the margins. So when an issue finally gains national attention, we get what we’ve had for the past two weeks: lots of talk about capping rates on some student loans, but no real interest in the bigger and more important questions — higher education costs, ballooning education debts, and the implications of America’s dismal performance in math and science relative to our economic peers around the world.
Once President Obama decided to make a national case over cutting student loan rates, the die was pretty much cast. With a federal loan subsidy provision expiring June 30, rates on certain new loans are scheduled to rise from 3.4 percent to 6.8 percent. Mitt Romney agreed that the lower rate should be maintained; the House and Senate passed legislation; and pending an agreement on the best way to cover the $6 billion in annual costs, a bill will be signed to much White House fanfare this month.
We’ll get to hear lots more about this victory throughout the presidential campaign. But one thing we won’t hear Obama talk much about is the extraordinary expansion in student debt during the past decade, the dramatic increase in default rates, and the threat this poses to taxpayers down the road.
Since 1999, the student debt burden has grown by over 500 percent, topping $850 billion this year — more than either credit card or auto debt. Recent history tells us one thing: Lending more money to more people with lower lending standards means higher default rates. In 2008, the last year for which data are available, default rates were at 7 percent — up from 4.8 percent just five years before. The New York Fed estimates that 27 percent of borrowers have past due balances.
Keeping interest rates down may be easy politics, but with private lenders cut out from federal loan programs as part of Obamacare in 2010, the long-term costs of these growing defaults will fall squarely on the taxpayer.
Hand-wringing over interest rates also allows politicians to avoid raising more important questions like: Are these higher education subsidies being used wisely? Yearly federal spending for higher education includes $45 billion in grants and well over $100 billion in new loans. That’s an awful lot of money. But when you get right down to it, the government expresses very little interest in what students spend the money on.
For all of our rhetoric about the importance of economic competitiveness, technology, and innovation, we provide the exact same level of subsidy for a degree in medieval languages as we do for an engineering degree. So why should a student prefer to study the latter?
Why should the university care, either? It’s getting paid handsomely either way. And as long as the government keeps raising grant levels and allowing students to borrow ever more, schools can keep raising prices. During the past 30 years, inflation in higher education has outpaced food, energy, and even health care.
Interestingly, the segment least affected by US government policy — international students — enrolls disproportionately in the sciences, engineering, and mathematics. Of the 723,000 foreigners in American universities in 2011, 46 percent pursued these so-called STEM disciplines. Just 15 percent of their American counterparts were so motivated.
These statistics are all the more striking given that student performance in math and science appears to be correlated to economic performance. Writing recently in the Wall Street Journal, education economist Eric Hanushek and former Secretary of State George Shultz observed that over the last 50 years countries with the highest math and science skills enjoyed significantly higher rates of economic growth.
While politicians like to talk about the importance of STEM, their priorities and policies often say something else. Public and private sector support for fundamental scientific and mathematical research is important, but Gates Foundation research shows that students are often inspired to pursue STEM fields well before high school. Yet in many parts of the country reforms that align pay to performance and overhaul teacher tenure rules look as unlikely today as they did 20 years ago. And at the national level, we talk about shaving a few points off interest rates and continue to sweep the real issues under the rug.