Education: Article for My Students at the End of the College Semester – Food for Thought

Is Student Debt Really Worth It?

Bryce Covert – New Deal 2.0

Whether or not we’re in the midst of a higher education bubble, are grads really getting enough bang for their buck?

This week’s credit check: Average student loan debt is $23,186. For each $10,000 in debt a student takes on, the likelihood of taking a job in a lower paying industry drops by about 5-6 percentage points.

GOP Rep John Kline, Education Committee Chairman, recently suggested that the appropriate reaction to S&P’s potential US downgrade is to cut spending on Pell Grants. Pell Grants provide need-based grants for low-income students; funding for the program increased to $41 billion in Obama’s budget proposal from $16 billion in 2008, although about 40% of that growth is due to increased demand because of the recession. Cutting this spending, Kline says, would help the US deal with its “mountains of debt.” But what he leaves out is that reducing the program simply shifts the burden of debt onto students. Grants have been declining over the last thirty years, with loans (read: debt) replacing them. Two-thirds of financing used to come from grants, and now two-thirds comes from loans.

Lately there have been whisperings — and shouts — that the next bubble is higher education. With exploding tuition costs and mounting debt loads, some are wondering if it’s about to pop. But whether or not America’s students are caught in the middle of another bubble, it’s worth asking: are they getting enough bang for their buck? Especially when that “buck” is a load of debt that can’t be discharged in bankruptcy?

There’s evidence that a college degree pays off in higher wages. Census data from 2008 shows that the average earnings for those with a bachelor’s degree were $58,613, compared to $31,283 for those with only a high school diploma. But that bump is likely extremely diminished when college grads enter a job desert like our current market. Economists have found a drop in entry-level job wages around 6 or 7% for every percentage increase in unemployment. One study in Canada even found a 9% drop. This drag doesn’t just go away after a grad moves out of the entry-level job, either — Lisa Kahn found that “even 15 years after college graduation, the wage loss is 2.5% and is still statistically significant.” This also affects your ability to pull yourself up by the bootstraps; she found that “workers who graduate in bad economies are unable to fully shift into better jobs after the economy picks up.” So today’s grads who leave college with loads of debt aren’t necessarily getting the deal they’ve been promised.

Beyond this, in good times and bad the specter of student debt is going to affect the career choices our grads make. A study in 2007 found that for each $10,000 in debt a student takes on, the likelihood that he or she takes a job in the nonprofit, governmental, or education sectors drops by about 5-6 percentage points. The authors of the study, Jesse Rothstein and Cecilia Elena, conclude: “[S]tudents with more debt are less likely to accept jobs in low-paying industries and accept higher-paying jobs more generally.” Those high paying jobs tend to be pretty concentrated in one place: Wall Street. Not to mention, as Mike Konczal points out, the financial sector also lures our best and brightest with the promise of prestige, power (through the revolving door with DC), and the idea that these jobs won’t become obsolete in today’s economy. The more debt we ask students to take on in order to get a degree, the fewer options remain economically viable when they enter the job market.

And what happens if there is a bubble and it bursts? Although a bubble popping is going to cause a lot of pain, if the debt that built it up can be discharged through the clean slate of bankruptcy, we can work on starting over. But student debt isn’t dischargeable in bankruptcy. If this is indeed a bubble, a bunch of unemployed or underemployed grads with student loan debt averaging $23,186 are going to find themselves with a commodity of less value and no way to get rid of this burden.

An education is more valuable than a simple price tag, but today’s students are asked to take on a heavier and heavier burden of debt in exchange for a degree. Are they getting value for that investment? The answer may be more complicated than a simple “yes.”