Do Students Borrow Too Little?

In June 2010, total student-loan debt passed total credit-card debt for the first time, and the total amount owed now approaches $1 trillion. Anecdotes about unemployed grads with $100,000 in unpaid loans abound. But what if the greater problem were that some people who should be taking out educational loans are failing to, or that borrowers aren’t borrowing enough?

The situation isn’t either-or, obviously — over-borrowing can co-exist with under-borrowing — but a new analysis of student debt puts the focus on the latter. Or, to put it more mildly, it stresses that most current educational borrowing is wise. An overemphasis in news coverage of students drowning in debt, argue Christopher Avery and Sarah Turner, in the latest issue of the Journal of Economic Perspectives, is scaring people away from taking on healthy debt. Art-history majors who are $100,000 in the red and unemployed exist, to be sure, but accepting them as typical amounts to a species of “cognitive bias,” Avery and Turner argue.

In analyzing student debt, it’s crucial to look at both sides of the ledger. On the debt side, the average student who borrows, who graduates from a four-year public college, leaves owing $7,500, Avery and Turner write. At a private nonprofit college, the corresponding figure is $15,500, and at a four-year, for-profit college, $45,000. (Those figures rise, for the 90th percentile of borrowers, to $32,400, $45,000, and $100,000 respectively — for-profit colleges are clearly emerging as a special case.)

But one takes out an educational loan as a capital investment, and it’s an investment on which returns have been growing. In 1978,  men with high school diplomas or “some college” tended to have similar earnings, as did men with either a college degree or a degree beyond a bachelor’s, Avery and Turner note. By 2008, however, “some college” was outpacing a high school degree; bachelors’ degrees had pulled away from “some college” (by an even greater amount); and post-graduate degrees were paying large dividends — especially in the top 50% of the income curve. (See the two charts, above.)

Whereas, in 1978, a college degree meant that a man was likely to earn, on average, $360,000 or so more, over his lifetime, than a peer with only a high-school degree, that gap had grown to more than $600,000 by 2008, in equivalent dollars. The magnitude of the change was similar for women.

In many cases, then, the economic case for taking out a $10,000 or $20,000 or even much higher loan is clear. (You can pay back a $20,000 loan in 10 years on a salary of $26,000, according to standard benchmarks.) However, several other things have changed, along with the lifetime increase in earnings, including the riskiness of the proposition. The cost of failing to graduate can be far greater, for example, and it is harder to predict where one will end up in the spectrum of possible future earnings, even within a specific major. (It’s also all the more important, too, to remain alert to the earnings potential of various majors.)

Is there direct evidence that students who should be borrowing do not?  One possible indication is that one in six full-time students at four-year colleges who are eligible for a student loan do not take one out. This could be rational self-control or short-sightedness. Also, half the students who work more than 20 hours a week, to pay for school, have no loans — though such onerous jobs may hurt their chances at graduating. And many students take on credit-card debt without maxing out on student loans, which is unwise.

The picture that emerges from this survey is complex, but Avery and Turner conclude on a strong note:

The claim that student borrowing is “too high” across the board can—with the possible exception of for-profit colleges—clearly be rejected.


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