Author: Robert

Note: This piece first appeared on the Brookings Institution’s Brown Center Chalkboard blog.

Student loan debt in the United States is now over $1.25 trillion, nearly three times as much as just a decade ago. The typical student graduating with a bachelor’s degree with debt (about 70 percent of all students) now owes between $30,000 and $40,000 for their education, about twice as much as a decade ago. Although taking on modest amounts of debt in order to pay for college is generally a good bet in the long run, colleges with similar admissions standards and resource levels leave students with different amounts of debt.

College Scorecard data highlight the large amount of variation in what high-debt undergraduate students borrow across colleges with similar admissions criteria.¹ The figure below shows the distribution of the 90th percentiles of debt burdens (in 2016 dollars) for students who left 1,156 four-year public and private nonprofit colleges in 2006 or 2007, broken down into three selectivity categories.² Not surprisingly, the most selective colleges, which have the resources to offer more scholarships and fewer students with financial need, have lower debt burdens than somewhat selective or less selective colleges. These differences in borrowing by selectivity are larger than by type of college, as median debt at public colleges was only about $2,400 more than at private nonprofit colleges.

Attending college and taking on $40,000 or even $50,000 in debt can be an outstanding investment in a student’s future—but only if students from that college actually end up getting good jobs. I then examined the relationship between 90th percentile debt burdens upon leaving college in 2006 and 2007 and the median earnings of students in 2011 and 2012 who began college in 2001 and 2002.³ The figure below shows that colleges that tend to have higher amounts of student debt also tend to have lower earnings in later years, which is in part due to student characteristics and their prior family income rather than the causal impact of the college. The correlation coefficient between debt and earnings is about -0.35 overall, but between -0.10 and -0.20 within each selectivity group. This suggests that colleges with higher debt burdens also have higher earnings, but much of the relationship between debt and earnings can be explained by selectivity.

An old rule of thumb in paying for college is that students should not borrow more for a bachelor’s degree than they expect to earn one year after graduation. Although the presence of income-driven repayment programs allows students to repay their federal student loans even if they make less money, the debt-to-income ratio is still a useful way to judge colleges. The final figure shows the distribution of colleges’ debt-to-income ratios using the initial debt upon leaving college for high-debt students and annual earnings approximately five years later. A ratio over 1 at this point is a major concern, as earnings should grow considerably during a student’s first few years after college.

Few high-debt students at the most selective colleges likely have issues making enough money to repay their loans, as just one of the 191 colleges in this category had a debt-to-earnings ratio above 1. Just under 15 percent of the somewhat selective colleges had ratios above 1, while about one-third of the least selective colleges had ratios above 1. This reflects the fact that financially-struggling students who attend less selective colleges (roughly 13% of the undergraduates in my sample, or about 800,000 students) take on more debt and earn less money than high-debt students at highly-selective colleges.

With student debt being a growing concern among Americans and playing a key role in the presidential campaign, students and their families are wise to consider the likely return on their investment in higher education. As the data show, some colleges do leave their former students with less debt than other similar colleges. But among less-selective colleges that enroll large numbers of lower-income or minority students, some amount of debt is almost unavoidable. Students should not seek to avoid all debt, but they should be mindful that even among broad-access institutions, colleges vary in how much debt their students take on.

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¹ Debt and earnings data from the College Scorecard combine students who graduate with those who dropped out.

² Colleges in the Barron’s categories of special, noncompetitive, and less competitive are in my lowest selectivity tier (n=195), colleges in the competitive, competitive-plus, and very competitive categories are in the middle tier (n=770), and all others are in the highest tier (n=191).

³ The College Scorecard does not track debt burdens by when students started college (only when they left), so I estimated that students either graduated or left college in about five years.

I wrote the below letter to the editor of the Star-Ledger, New Jersey’s largest newspaper, in response to a truly woeful editorial piece that they recently published on student loan debt. (Note: They eventually ran the letter, but here is a slightly revised version for your enjoyment.)

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As a college professor who researches the implications of student loan debt, I was dismayed to read the Star-Ledger Editorial Board’s recent piece titled “Why we should all be terrified of student loans.” Yes, the $1.25 trillion in outstanding student loan debt is a concern, but the typical amount borrowed for a bachelor’s degree is more manageable—about $30,000 per student. Students who borrow from the federal government can also enroll in income-driven repayment programs that allow them to make small or no payments if their income is low.

The “terrified” headline has the potential to scare students and their families away from making a worthwhile investment in college. Research shows that low-income, first-generation, and minority students are particularly averse to borrowing for college, even when borrowing a reasonable amount of money would help them attend and graduate college. Students and their families should be careful about taking on too much debt, particularly from programs like New Jersey’s state student loan system that do not allow payments to be tied to the student’s income. But students should not be terrified of taking out modest loans from the federal government to make college a reality.

The traditional way to repay federal student loans was for students to pay back their loans over a ten-year period of time, generally by making the same payment each month. But as student loan debt has generally risen over time (although falling ever so slightly in the most recent quarter), paying off larger loans in a short period of time has become more difficult for many borrowers. This has made income-driven repayment plans, expanded during both the Bush and Obama Administrations, an appealing option for more students (although the future price tag of the programs is something to watch closely in the future).

The U.S. Department of Education recently released new data (updated every three months) on the federal student loan portfolio showing the growth in income-driven plans. The chart below shows the percentage of dollars in the Direct Loan program that are in one of four broad categories: 10-year payment plans not tied to income, longer payment plans not tied to income, income-driven plans, and miscellaneous plans that don’t fit well in any of the above three categories.¹

Since 2013 (when repayment plan data first became available), the federal government’s holdings in the Direct Loan program have risen from $361 billion to $673 billion. The amount of loans in the standard ten-year repayment plan rose from $168 billion to $267 billion during this time, but the amount in income-driven plans rose from $72 billion to $269 billion in just three years. Income-driven plans now make up 40.0% of all Direct Loan dollars, while 39.7% of dollars are now in ten-year plans.

The Department of Education also released data for the first time on the number of students seeking employment certification in the Public Service Loan Forgiveness (PSLF) program, which will allow students working in approved fields to make ten years of payments instead of 20-25 years under other income-driven plans. While students aren’t officially in PSLF until they complete ten years of payments (the first students will do so in October 2017), this is an interesting measure of potential interest in PSLF. The below figure (from Federal Student Aid) shows the number of students who have submitted employment certification forms in possible preparation for receiving PSLF.

Notably, about one-third of all requests have been denied to this date, suggesting that quite a few students will get an unpleasant surprise when they go apply for PSLF in the next few years. But at least 430,000 students look to be on track for PSLF at this point—a number that is likely a significant understatement of the number of applications that the federal government will receive.

¹ The Direct Loan program represents about 90% of all loans held by the federal government. The other 10% are in the older Federal Family Education Loan (FFEL) program, which has not disbursed new loans in years but has about one-third of its loan dollars in income-based plans. I excluded FFEL here because repayment plan data are only available for 2016.

A recent analysis by economists at the Federal Reserve Bank of New York looked at the approximately 14% of American households that had negative wealth in 2015 and pointed out student loan debt as a key driver of negative wealth. As a key figure from the report (which is reprinted below) shows, student loan debt is responsible for between 40% and 50% of total negative wealth among households with a net worth of below -$12,500.

This isn’t a tremendously surprising finding, although it’s always helpful to document something intuitive with actual data (although self-reported data always come with caveats). Student loans are one of the few types of debt aside from medical or legal bills that can be taken on in large amounts without having outstanding credit or collateral. Credit card debt is another way to take on debt, but most people with negative wealth won’t be able to access large lines of credit this way. It’s also possible to be underwater on a house (by owing more than its current value), but this affects a relatively small percentage of households.

The authors of the analysis then wrote the following about the implications of student loan debt:

“It is likely that the steady growth in student debt and borrowing, combined with the very slow rate of student loan repayment we have documented elsewhere, has materially contributed and will continue to contribute to negative household wealth and wealth inequality.”

As I told Inside Higher Ed in their summary of the analysis, I only partially agree with that assessment. The challenge with this analysis is that it combines students who completed and did not complete a degree (likely due to sample size issues, as the dataset includes questions about educational attainment). As the authors note, households with a bachelor’s degree or higher and negative net worth tend to have a young head of household. For example, my household is just now leaving negative net worth territory, five years after our head of household completed law school.¹ Paying off student loan debt is difficult, but the rapid growth in takeup of income-driven repayment plans among high-debt individuals (as shown in this recent White House report and in the chart below) has the potential to reduce this burden.

I’m far more concerned about the implications for wealth inequality among students who did not complete a degree and are unaware of income-driven repayment options. Although there are positive economic returns on average for students who attend college but do not graduate, they are far smaller than students who finish. A better measure of wealth inequality would look at how wealth progresses over a ten-year window after a student leaves college. If he or she is able to repay loans and build assets, the picture is far less bleak than if a student still has negative wealth due to student loans and other types of debt.

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¹ In 2016, the term “head of household” is outdated. In households where both adults work, it’s far from clear who should be the head and who isn’t. It would be better to know the highest educational attainment of either of the adults.