What If You Had to Know Your Future Income Before You Applied for a Student Loan?

Changes are likely to come to the federal-loan program in the coming years as lawmakers try to figure out ways to reduce spending and control college costs. Whatever the changes, the result will probably be a reduction in loan availability.
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The Education Department will finally release the "gainful employment" rule today. In short, this much-anticipated and much-debated regulation would cut off federal student aid to vocational programs whose graduates carry high debt loads and have low loan-repayment rates.

Some at traditional nonprofit colleges have been looking forward to the rule, thinking it will affect mostly for-profit colleges, slow down that sector's runaway growth, and put an end to its most egregious recruiting tactics.

But what if the premise behind gainful employment was more broadly applied across higher education? In that way, students' potential future income would be taken into account when they apply for student loans--just as our current income is factored into what kind of house or car we can afford when we apply for other types of credit.

In looking at the earnings-by-major data released last week by Anthony P. Carnevale at Georgetown University, it's striking to see how income for someone with a bachelor's degree differs widely based on the undergraduate major. As The Chronicle's Beckie Supiano reported, "For workers whose highest degree is a bachelor's, median incomes ranged from $29,000 for counseling-psychology majors to $120,000 for petroleum-engineering majors. The data also revealed earnings differences within groups of similar majors. Within the category of business majors, for instance, business-economics majors had the highest median pay, $75,000."

Instead of the current system, which puts limits on what undergraduates can borrow from the government based on their year in college, Congress could create a system with loan limits tied to a percentage of projected median future income so students were more assured of graduating with manageable debt. Carnevale found a high correlation between what students majored in and what professional field they ended up pursuing.

Of course, students change majors, some don't pick majors immediately, some majors don't translate directly to careers, and graduates may choose alternative and lower-paying professions than the ones they majored in, but such a system could be designed so that, over all, the amount of money students borrowed would be more closely aligned with their future earnings potential.

Yes, there are many pitfalls to such a system. Perhaps the biggest one is that students, particularly those dependent on loans, would shy away from low-paying majors if colleges continued to have one sticker price for everyone. So colleges would need to be more flexible in their own pricing. Colleges already offer discounts on the back end, usually to fill a class with a particular kind of student. There's been a lot of talk over the years about differential tuition, but few campuses have pursued assigning different tuition rates to students based on such factors as their family income, the time of day they take classes, and what major they pursue.

Changing the provisions of the federal-loan program would force many colleges to be more inventive on pricing, given that some prospective students would not have as much loan money available to them. Linking the amount of a loan to a future profession could be tested at the graduate level, where a student's career aspirations are usually more certain and where the burden of debt is the highest.

Changes are likely to come to the federal-loan program in the coming years as lawmakers try to figure out ways to reduce spending and control college costs. Whatever the changes, the result will probably be a reduction in loan availability.

That could spell trouble for some nonprofit colleges whose students depend heavily on federal loans. Among the top colleges in loan volume in 2009-10 whose ranking can't be explained by high enrollments: New York University, Liberty University, the University of Southern California, DePaul University, George Washington University, Drexel University, and Georgetown University (hat tip to Mark Kantrowitz, publisher of the Web site FinAid, for providing the list after a conversation some colleagues and I had with him about borrowers in distress at a conference this year).

So while some nonprofit-college officials might be applauding the release of the gainful-employment rule, perhaps they had better worry about what's next for them.

-- Jeffrey Selingo
The Chronicle of Higher Education

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