How Worrisome Is Student Debt?

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The New York Times
By: Judith Scott-Clayton
April 15, 2011

Judith Scott-Clayton is an assistant professor at Teachers College, Columbia University.

Student loan debt has risen to its highest level ever, with starting balances averaging $24,000 among the two-thirds of graduates who borrowed for their degree, Tamar Lewin noted in an article in The New York Times on Monday. This increase has heightened longstanding concerns that college students are borrowing too much.

Economists tend to be less troubled by the trend, Ms. Lewin noted, viewing student loan debt as a worthwhile investment that pays off over a lifetime. Many economists even raise the concern that an irrational aversion to debt may lead some capable students to forgo college.

So should we stop worrying about student debt? Or are students and their families right to be alarmed? The key question is this: Are graduates better off, even with all that debt, than if they hadn't gone to college at all?

The answer seems clear: even with $24,000 in debt -- comparable to the cost of a new midsize car -- the average four-year college graduate is likely to be substantially better off over the long term than someone with only a high school education, data show.

Median annual earnings for full-time workers with a bachelor's degree are around $53,000, compared with $33,000 for those with a high school diploma, and unemployment rates among college graduates are just over half of the rates for those without a degree.

Yet there are at least three reasons this level of debt may be troubling.

First, while the returns to a college degree accrue over a lifetime, loan repayments are typically expected within 10 years of graduation. And graduates don't typically earn $53,000 in their first year of employment; it may take a decade or more to reach this level. The median graduate is likely to start out somewhere closer to $35,000.

Current Population Survey, Census Bureau

Earnings were calculated using October data, 1999-2008, on individuals with only a bachelor's degree who were employed full time and not enrolled in school.Second, not every graduate will get the average outcome. For those who do worse, the debt may be particularly burdensome. And it is not easy for students (or even economists) to predict what the economy will be like several years from now, or how any individual will fare in it.

So while it may be an excellent investment on average, there is a real risk that some graduates with $24,000 of debt will face unmanageable monthly payments particularly in the early years of their careers.

On the standard 10-year repayment schedule with a fixed interest rate of 6.8% (the current rate for unsubsidized federal student loans), monthly payments would be about $276. If payments up to 10 percent of gross monthly income are considered affordable, then a graduate would need to earn $33,000 annually to comfortably manage this debt. Most will do so, but many will not.

Third and perhaps most important, not every borrower will graduate. Among 2003-4 college entrants who ultimately borrowed $22,000 or more, 31 percent did not have any postsecondary credential six years later (see chart below). And unemployment rates and earnings for people with "some college, no degree" look much more similar to those with only a high school diploma than they do to bachelor's degree recipients.

U.S. Department of Education, National Center for Education Statistics, BPS: 2009 Beginning Postsecondary Students
Luckily, federal loans have options beyond the 10-year repayment plan, and many students take advantage of them. Graduated, extended or income-contingent repayment plans may offer substantially lower monthly payments, with repayment periods of up to 25 years (see these loan repayment calculators offered by Mark Kantrowitz of

Policy changes tucked into last year's health care act also strengthened protections for those who face economic hardships.

These additional options and protections -- which apply only to federal loans, not private loans -- reduce but do not eliminate the risk students take when they borrow for their education. So anxiety is likely to continue because, frankly, this stuff is complicated, and the consequences of defaulting on a student loan are severe.

Plenty of resources are available to help students learn how to borrow responsibly. But some, like this 56-page federal guidebook, may be too much for young adults to digest, given high rates of financial illiteracy. Those who try to navigate these resources on their own may come away feeling frightened rather than informed.

Policies like the one at Tidewater Community College in Virginia, which require students to estimate their loan repayments and plan their budgets before taking a loan, may be the best strategy for promoting wise borrowing decisions.

No one is ever going to love their student loans. But we don't want students to be afraid of them, either -- because forgoing a college degree may be the biggest risk of all.

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This page contains a single entry by CFED published on April 15, 2011 3:45 PM.

The Price Paid for Keeping the Maximum Pell Grant in Place was the previous entry in this blog.

For some students: No repayment plan, no loan is the next entry in this blog.

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