Student Loans: The Good, The Bad and The Ugly

It’s hard to hear the phrase “student debt” without “crisis” appended. But like most types of debt, there is “good” student debt and “bad” student debt. To understand the difference, it’s helpful to look at the economics of a college degree. A college education confers many benefits, but when evaluating debt the economic ones are key.

College graduates—those with a bachelor’s degree or higher—have higher employment rates and higher earnings than those without. The Social Security Administration in 2015 estimated the present value of a college degree, based on increased lifetime earnings, as $260,000 for men and $180,000 for women. This is based on college-educated men earning $900,000 more over their lifetimes than those with only a high school diploma and women, $655,000. Men with graduate degrees earned $1.5 million more; women, $1.1 million more. That doesn’t mean that it makes sense to borrow $180,000 to finance college, but it does mean that college is likely to be a good investment and a reasonable amount of borrowing is acceptable if it makes attendance and graduation possible.

What’s reasonable? Since loans get repaid early in life—payment plans start six months after graduation—it’s helpful to look at expected earnings. Among all adults over age 25, in Q3 of 2020 the median weekly earnings for those with at least a bachelor’s degree was $1,457; for those with a high school diploma only, it was $793, or barely half as much, according to the Bureau of Labor Statistics. Among young adults (ages 25-34) who work full-time, bachelor’s degree holders have consistently out-earned high school diploma holders by about $20,000 annually (in constant 2018 dollars) according to the National Center for Education Statistics. In addition, Bureau of Labor Statistics data shows that the unemployment rate for degree holders is consistently about half the rate of diploma holders.

Fortunately, most undergraduates who borrow graduate with student loan debt that falls under the “reasonable” heading: average debt for the class of 2019 was $30,062 upon graduation, with 65% of graduates having borrowed. Those loans could be repaid in 10 years with monthly payments of approximately $325. Annually that’s around $4,000, considerably less than the earnings gap.

How do you end up with a loan balance that’s affordable? Ideally you stick within the limits of the federal direct student loan program. Federal direct student loans have an annual cap– $5,500 for first-year students, $6,500 for the second year, and $7,500 for the third and fourth years. Depending on each year’s interest rate and whether a portion of the loan is subsidized, the student who limits borrowing to the federal direct student loan program will take out a total of $27,000; accrued interest will typically add a couple of thousand dollars to the balance.

What about all these student loan borrowers who are delinquent in their payments? The Federal Reserve, in its annual Report on the Economic Well-Being of US Households released in May 2020, reports on the payment status of student loans by borrower segment. (The data in the 2020 report is from 2019, pre-pandemic.) The quick answer is, it’s mostly not bachelor’s degree holders. According to the Fed’s survey, only 9% of public university graduates and 7% of private non-profit college and university graduates are behind on their student loans.  

So where does the student loan crisis come from? Those who struggle with student loan debt tend to fall into one of several categories:

• Those who enroll in college, borrow and leave having completed less than an associate degree. Of this group, 40% are behind on their student loan payments.

• Those who attend private for-profit colleges; 24% of these graduates are behind.

• Those who borrow for graduate school. Average debt among medical and dental school graduates is over $200,000; for veterinary school graduates it’s almost $150,000. Across all disciplines, average debt for graduate students is $82,800.

This is not to make light of the student loan crisis; there are plenty of individuals and households that struggle with student debt, even before the pandemic. However, it is entirely reasonable for an undergraduate to take out the full direct student loan every year, as long as the student graduates from college and proceeds to a career. The increased expected earnings will more than cover the loan payments.

For additional insight see Student Loan Types.