Over the last two decades, the number of young households with education debt more than doubled, and the mean per-person debt tripled. More young people are going into debt, and they’re carrying more of it. In Maine, average student debt is $29,934, slightly higher than the national average of $28,400.
The question, however, is whether the debt people hold is unreasonable given what their college degree gets them in their lifetime — typically higher wages and a greater chance of employment.
People often discuss the amount of student debt as the problem. One Forbes staffer wrote in 2013 that “student loan debt is a problem that will cripple economic possibilities and success to come.”
But the problem isn’t necessarily the debt. It’s whether the debt is a good investment.
“[T]o the extent that borrowers are using debt as a tool to finance investments in human capital that pay off through higher wages in the future, increases in debt may simply be a benign symptom of increasing expenditure on higher education,” Beth Akers, a Brookings Institution fellow who researches higher education and student loans, said recently in testimony before the U.S. Senate.
So does the long-term return on college make up for the cost of the debt required to get the degree?
Yes, actually.
Here’s why, according to Akers:
— The lifetime earnings of people with bachelor’s degrees outpace costs. “In 2011, college graduates between the ages of 23 and 25 earned $12,000 more per year, on average, than high school graduates in the same age group, and had employment rates 20 percentage points higher. Over the last 30 years, the increase in lifetime earnings associated with earning a bachelor’s degree has grown by 75 percent, while costs have grown by 50 percent.”
— The financial return on college is steady, despite stagnant earnings. “A recent study, published by researchers at the Federal Reserve Bank of New York in 2014, suggested that the financial return on a college degree, when expressed as a rate of return, was 15 percent and had held steady at that level (a historic high) for the previous decade. A valuable insight from this work is that the return on college has not fallen, despite the growing cost of attendance and stagnant earnings growth across the economy.”
— Graduates have lower monthly loan payments. “[T]he transitory burden of loan repayment is no greater for today’s young workers than it was for young workers two decades ago. If anything, the monthly repayment burden has lessened. This surprising finding can be explained in part by a lengthening of average repayment terms during the same period. In 1992, the mean term of repayment was 7.5 years, which increased to 12.5 years in 2013. This increase was likely due primarily to loan consolidation, which increased dramatically in the early 2000s.”
— Debt is a relatively small slice of household budgets. “The largest categories of monthly consumption expenditure are housing ($1,407), transportation ($750) and food ($588). Monthly student loan payments are relatively small compared to these expenses, and at $242, are closer in scale to monthly spending on entertainment ($217), apparel ($145) and health care ($296).”
— High student debt doesn’t necessarily indicate economic hardship. “Among households with outstanding education debt in the lowest quartile of the debt distribution ($0 – $3,386), 34 percent report having made a late payment on a financial obligation in the past year compared with 26 percent of households with education debt in the highest quartile (≥$18,930). Households with student loan debt do not show indications of financial distress more often than households without student loan debt.”
Of course no one is guaranteed a return on a college degree.
As Akers said, the “body of evidence contradicts the notion that a crisis of college affordability exists on a macro level. However, it is undeniable that many individuals and households are facing serious economic hardship that can be explained completely or in part by their spending on higher education.”
The U.S. can help people make smart decisions about college by ensuring they have the information they need to know where to enroll. (For instance, a database that shares the future earnings of graduates at various colleges would help students decide where to go.)
Also, federal lending programs could be streamlined and simplified to help students understand their financial obligations. (Alarmingly, nearly a third of first-year students with federal student loans say they have no debt.)
In short, college is still worth it in the long term, but more safeguards could improve the value of the investment.
