The Ultimate Question: “Is College Worth It?” (Part 3)

The realities behind student debt and the “bubble.”

In Part 1, I argued that the proper way of determining whether college was worth the investment was first to examine four distinct concerns—high cost, high debt, scarce jobs, and low graduation rates.  Last week, in part 2, we looked at the first of these concerns: has college simply become too expensive for many families? This week, we’ll examine the second concern:

There is a student debt “bubble” that is preventing young college graduates from buying homes, starting families, and thereby acting as a drain on the entire economy.

This topic has been the subject of much hand wringing in recent months (National Public Radio, “Senator Warns of a Student Loan Bubble,” March 27, 2014). It’s not enough, the critics say, that colleges have become too expensive. No, even worse, their extravagance and self-indulgence is crippling the American economy! (The New York Times, “How Student Debt May Be Stunting the Economy,” May 15, 2014) Young college graduates, collapsing under the weight of huge educational debt, are living in a kind of indentured servitude, doomed, it would seem, to forgo having a family or purchasing a home, possibly forever! (The Boston Globe, "Crippling Debt Defers Graduates' Dreams," August 24, 2013, a report subtitled “Thousands of recent college graduates with loans to pay off are putting their plans for better lives on hold,” and focused on four graduates, three of whom accumulated more than $70,000 in debt acquiring undergraduate degrees, placing them in the top six or seven percent of all students graduating with debt.)

Well, not so fast. This is a topic awash in lurid commentary, coupled with the sort of breathless tone generally reserved for describing an unfolding natural disaster, or the potentially winning putt on the 18th green at the Masters.

Let’s take this statement apart. How serious is the student debt issue? For a tiny fraction of college graduates—those with high five-figure or even low six-figure debt—it is a serious matter indeed. But however real and daunting those stories may be, they are not representative of the situation facing the great majority of college graduates.

First, about one-third of college graduates have no debt at all (Council of Independent Colleges, "Student Debt: Myths and Facts," April 2014).

Second, of those who have debt, the median is slightly under $30,000—not much more than the price of a new car—and median debt per bachelor’s degree recipient (that is, including those without debt) is approximately $16,000 (Council of Independent Colleges, “Student Debt:  Myths and Facts,” April 2014).

Third, more than 65 percent of all graduates have debt of less than $10,000 (The Chronicle of Higher Education, The Miseducation of America,” June 19, 2014).

Fourth, it is important to distinguish debt acquired to obtain an undergraduate degree from debt accumulated for a graduate or professional degree. Not surprisingly, people who have borrowed both at the undergraduate level and at the graduate (or professional) level often have very high debt levels—but their anticipated income is also significantly higher than the income generally earned by a person with just an undergraduate degree.

Fifth, the fraction of income devoted to loan payments by the average person with student debt has not changed significantly over the past 20 years. It was 3.5 percent in 1992, 4.3 percent in 1998, and 4 percent in 2010 (The New York Times, "The Reality of Student Debt is Different from the Cliches," June 24, 2014).

But total student debt is over $1 trillion and climbing! It’s more than all credit card debt combined! Isn’t this a really serious situation?

Let’s put this issue into perspective. First, one important driver of the total amount of student debt is the fact that there are more students in college today than there were a decade or two ago. 

Second, although a larger percentage of students are taking out debt than they did a decade ago, some of the growth in debt is the result of inflation.  The only fair way of looking at the growth of debt over time is to adjust it for inflation. When we examine the growth of debt in inflation-adjusted dollars, the increase is much less dramatic.

Third, paying off the debt is not the onerous process so often described.  The monthly payment on a debt of $30,000 is $350—not a trivial sum, but just nine percent of the average salary of $45,000 of a college graduate aged 25 to 34 (The New York Times, "Finding Shock Absorbers for Student Debt," June 14, 2014). Given the difference in income between a high school graduate and a college graduate (a topic to be discussed in another installment of this blog post), a payment of this amount seems manageable. And concern over increases in the interest rate charged by the federal government on student loans seems overwrought:  the recent increase to 4.66 percent (from the previous 3.86 percent) amounts to just $4 more per month per $10,000 of loans—unwelcome, to be sure, but hardly crippling.

A very recent analysis of this topic (Brown Center on Education Policy at Brookings,Is a Student Loan Crisis on the Horizon?” June 2014) concluded that a quarter of the overall increase in student debt was from an increase in the number of students taking graduate degrees—and that the increase in lifetime earnings more than kept pace with rising debt loads, and therefore “the reality of student loans may not be as dire as many commentators fear.”

A subsequent commentary on the Brookings report by Pulitzer Prize-winning journalist David Leonhardt (The New York Times, “The Reality of Student Debt Is Different from the Clichés,” June 24, 2014) should have put concerns of an impending student loan “bubble” to rest—but no such luck. It’s more fun to talk about doom and gloom, and so, after a pause of a day or two, the pundits were right back at it, predicting the end of civilization as we know it, as a consequence of rising levels of student debt.

To be fair, there is one area where the concern over student debt is justified. The worst case scenario arises when a student takes on debt, but does not graduate. That individual will not reap the economic benefits that come with an undergraduate degree, and will instead have to pay back the debt from the much lower salary earned by those with just a high school diploma. I’ll deal with this very important subject in the next blog post.