Student Debt: How Much Is Too Much?

Student debt is back in the news. In early May, Senate Republicans blocked a bill to extend interest rate reductions for federal student loans. It does not help that May is also graduation season, when newspapers trot out the hard luck story of a religious studies major with no job and $100,000 in debt. But looking past the rhetoric, how bad is the picture for students? In “Student Loans: Do College Students Borrow Too Much–Or Not Enough?,” authors Christopher Avery and Sarah Turner take a hard look at the college investment.

On one hand, the costs of attending college and the consequences of student debt are getting worse. Spending on student debt has quadrupled in real dollars since the 1990s and students with high levels of debt are less likely to accept socially beneficial jobs like teaching. By one estimate, for every additional $10,000 in student debt, a graduate’s long-term probability of getting married decreases by 7 percentage points.

On the other hand, a college degree is more valuable today than ever before. The unemployment rate for college graduates is nearly half that of workers with only a high school diploma. The value of a college degree over a high school diploma in earnings increased from $50,000 to nearly $122,000 between 1981 and 2008.

Using a cost benefit analysis, Avery and Turner, assert that for the average student, the price of a college degree is still worth the cost. They highlight three factors to consider when deciding how much to borrow: the probability of completing your degree, the field in which you will study, and your eventual location on the income distribution scale.

For students in public four-year or private nonprofit four-year colleges, the cost of attending college is still lower than the expected returns. So, while the size of students’ debt seems large, the benefits of investing in a college education still outweigh the costs. In fact, Avery and Turner point out that some college students actually borrow too little. Among the nearly one in six students who do not take out loans for school, about 38 percent have credit card debt and 20 percent are working part time to pay for college. For these students, taking federally subsidized Stafford loans would be significantly cheaper than borrowing from credit cards and easier than working part time.

But not everyone is getting such a great deal. While most students in public and nonprofit colleges are borrowing the right amount, their peers in for-profit schools are typically borrowing too much. Avery and Turner point out that students in for-profit schools typically borrow more, earn less, and drop out more often than their peers in other schools. For these students, the cost of borrowing for a college degree is probably too high.

While it is easy to point to the law school student with a quarter million dollars in loans and no job and declare that students are borrowing too much for college, Avery and Turner find that for most students in public four-year or private nonprofit four-year colleges, the costs of borrowing are still in line with the expected value of a college degree. In fact, some of these students would be better off borrowing more. For students in for-profit schools, the picture is bleaker. Low graduation rates and poor job prospects can make borrowing to pay for school a risky proposition.

Feature photo: cc/Will Folsom