Don’t listen to those scary tales of student-loan woe

Christopher Shea has written for the Atlantic, the Wall Street Journal, and the Chronicle of Higher Education, where he is a contributing writer.

The last batch of this year’s college acceptance letters is in the mail, and scary news stories about how much an education will cost are in the air. We’ve heard tales of liberal arts majors with six-figure debts and entire families condemned to loan payments for decades to come. One Web designer in his early 40s told Consumer Reports last year that his $59,000 in loans felt “like a prison sentence.”

Sarah Williamson for The Washington Post

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It’s enough to make a teenager wonder, as Newsweek asked in a cover story last fall: “Is college a lousy investment?”

But there’s a big problem with some of those extreme anecdotes. For most U.S. students, college needn’t come with mounds of debt. And, as many economists have shown, it’s almost always well worth what it does cost — assuming that you graduate and, if your loans are largish, study something that actually helps lead to a job. Perhaps the biggest problem: All the dire talk about debt overload can scare off young people for whom education debt can have huge long-term payoffs.

No one denies that overall college borrowing is rising even as family assets have taken a recession-related hit. The amount of outstanding student debt in the United States is approaching $1 trillion. Private colleges have conspicuously failed to keep tuition under control. (At public colleges, blame for rising tuition is better laid at the feet of lawmakers who keep cutting subsidies.)

But research by economists refutes the prevailing tales of woe. “The claim that student borrowing is ‘too high’ across the board can — with the possible exception of for-profit colleges — clearly be rejected,” wrote Christopher Avery, a professor of public policy at Harvard, and Sarah Turner, an economist and education professor at the University of Virginia, in a survey of the topic in the Winter 2012 issue of the Journal of Economic Perspectives.

Avery and Turner’s argument is two-pronged: First, debt loads are lower than the average prospective student has been led to believe. Second, the economic returns on a college degree continue to be massive; in fact, they are much greater than they were a generation ago.

Among households with college debt, the average balance in 2010 was $26,682, according to the Pew Research Center. That could be reasonable or unreasonable, depending on the context. But, economists say, it’s also skewed by a small number of people, at a minority of institutions, who borrowed extraordinary amounts.

Breaking debt down by type of institution creates a far less terrifying picture. In their paper, Avery and Turner looked at the debt that students had amassed six years after first enrolling, in 2004, in three kinds of four year-colleges — public, private nonprofit and for-profit — as well as two-year public colleges. (As of 2010, public colleges granted about 64 percent of bachelor’s degrees, private non-profits 30 percent and for-profits 6 percent.)

At the public four-year colleges, the median student who got a bachelor’s degree owed $7,500. (How scary is that?) At private nonprofit colleges — places such as Goucher College in Towson and Yale University — the figure rose to $15,500. For students who started at two-year colleges then transferred to get a B.A., the median amount of debt was $11,971. The figure jumped to $45,000 for students at for-profit colleges — which explains, in large part, why these schools deserve particular scrutiny. Dropout rates at these institutions are also much higher.

But even those in the top range of debt usually aren’t experiencing the horrors that many have been led to expect. In the 90th percentile of borrowers, Avery and Turner found, graduates of four-year public colleges owed $32,405. At private nonprofit colleges, the figure was $45,000. Those who started at two-year colleges had taken out about $40,000. For-profit colleges, at $100,000, were again outliers.

A very few borrowers “are doing crazy and stupid things,” Turner said in a recent interview, but “the median person borrowing $15,000 at your average research university is doing a very rational thing.” According to one government standard for manageable debt, someone with a salary of $26,000 should be able to pay off a $20,000 debt in 10 years — with monthly payments of $210 or so — without undue strain. Things may have gotten worse since 2010, but not radically so.

One explanation for the mismatch between perceptions and reality about debt is that few people pay the “sticker price” at private colleges. Many middle-class and poorer kids get grants. In addition, many public colleges, despite tuition increases, remain relative bargains, and most parents are still (wisely) managing to save for college.

Economists have worked hard to measure the return on a college degree, and, while it’s a tricky thing to pin down, it’s potent. In one estimate, Avery and Turner calculated that the average man who earned a college degree in 1978 gained a lifetime earnings advantage of $360,000 over his high-school-graduate peers. For men who graduated in 2008, the lifetime earnings advantage, in equivalent dollars, ballooned to $600,000 — and women get a comparable boost.

Wouldn’t you consider taking out a $20,000 or $30,000 loan — the cost of a Honda Accord with a few options — for that kind of return?

Justin Wolfers, an economist at the University of Michigan, is another skeptic of the college-isn’t-worth-it thesis. “Not only does a college degree give you a higher stream of income, but it’s more recession-proof,” he says. He points out that the unemployment rate for those with at least a bachelor’s degree was 2 percent before the recession, rose to 5 percent and is now below 4 percent. In contrast, unemployment for people with only a high school diploma spiked to 11.9 percent and lingers at 8.8 percent, according to the Bureau of Labor Statistics.

Like Avery and Turner, Wolfers says there are a considerable number of cases in which students are borrowing not too much, but too little. Researchers estimate that half the students who work more than 20 hours a week to pay for school take out no loans. Since that amount of work leads to higher dropout rates and lost opportunities on campus, borrowing might be a far wiser strategy.

One in six students at four-year schools who qualify for student loans do not take them out, a 2010 study found. Smart frugality? For some. But many of those students rack up high-interest credit card debt.

There’s also strong evidence that it’s poor students, in particular, who overestimate the price of college — and underestimate the aid available to help pay for it.

In a study published last year in the Quarterly Journal of Economics, researchers from Stanford, Harvard, the University of Toronto and the National Bureau of Economic Research looked at the college-enrollment decisions of 26,000 families in Ohio and North Carolina. The families all had incomes under $45,000. When some of those students and parents were asked to guess what annual tuition was at a local two-year public college ($3,099 at the time), they overestimated by an average of 300 percent.

As part of the study, tax advisers at H&R Block, who were already doing the families’ taxes, explained the true costs of college to some participants and filled out financial-aid forms for them — a cheap, easy intervention. Among the high school seniors who had the forms completed for them, enrollment in college the next year was 42 percent, eight percentage points higher than for a control group.

That was a random sample of low-income students. But studies also show that a lack of information about costs specifically hurts high-achieving low-income students, who don’t understand that elite and expensive schools can offer them the most aid.

Lemondre Watson, a senior at William & Mary, recalls thinking, as a high school student in Lynchburg, that the tuition figures he was hearing were surreal: “I don’t know where that money is coming from!” he said to himself. At the time, Watson’s mother did manual labor at a pipe-fitting plant, and his father was a retired bus driver. William & Mary costs $25,938 annually for in-state students, including room and board.

But at the urging of his teachers at Heritage High School, he applied: “They were pushing me to apply to more ‘reach’ schools. My grades were good, and I was involved in a lot of things, but I told people even if I got into William & Mary, I wouldn’t go.”

When he did get in, he was startled to realize that, because his parents earned less than $40,000, he qualified for a full ride. That made the highly selective college considerably cheaper than the school he’d been focused on, James Madison University, which he says would have cost $2,000 a semester. (U-Va. has a similarly generous program for very-low-income students.)

Now, as he weighs job offers, he’s also thinking about becoming a college consultant. “I’d like to be a witness to kids who are going through the same thing — considering college but thinking they can’t afford it.”

Research affirms that many high-achieving low-income students don’t apply to the selective colleges that have the most generous aid programs. Avery and Turner call it “market failure,” which sends such students instead to more expensive, less prestigious colleges that also have higher dropout rates.

Yes, students should think about college debt. They should think about their majors and look at for-profit colleges with an especially wary eye. But parents and counselors should also tell students that, on balance, there are few better reasons to take out a loan — even a loan that seems very large to an 18-year-old. The payoff is just that big.

More than a debt crisis, what poor students contemplating college face today is an information crisis. All those tales of baristas with $120,000 in outstanding loans only make the problem worse.

cshea2@gmail.com

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