Americans took out $105 billion in student loans last year, twice the amount in inflation-adjusted dollars as in 1999. That makes student debt, as a category of consumer debt, second only to mortgages. Democratic presidential candidates are drawing applause by talking about free college and debt relief. As graduates toss their mortarboards in the air this month, here are five lasting misconceptions about the debt they’ll spend years or even decades paying back.
This is an old chestnut. “You can earn money by working while taking classes,” Yahoo Finance advised in May in an article headlined “5 Ways to Avoid Student Loans.” In 2015, CNBC touted the story of a mom whose “son snagged a job as a resident assistant, which covered his room and board.”
Anecdotes are not data. It was entirely possible in the 1980s to pay your way through a typical public university with a part-time minimum-wage job. But trends in both tuition and wages have put that strategy out of reach for most today. The average in-state cost for tuition, fees, room and board at a public four-year university last year was $21,370, according to the College Board. The federal minimum wage is $7.25 an hour. To pay for college on that wage, a student would have to work 56 hours a week, every week of the year. No wonder about 2 in 3 graduates of public and private nonprofit colleges borrow, a proportion that’s held steady for a decade.
This seems like a reasonable assumption. “Anyone who has shouldered the burden of six-figure student loan debt knows the heavy toll it can take,” HuffPost wrote on May 14. According to Entrepreneur magazine , “Stories abound of liberal arts majors leaving school with six-figure student loans.”
Yes, there are some. But the graduates who average six-figure student loan balances are generally doctors, lawyers and PhDs, according to the National Center for Education Statistics, and those degrees tend to come with six-figure salaries to match.
Meanwhile, those most likely to default on their student loans (and suffer a lifetime of financial setbacks that follow bad credit) have debt in the four figures, not six, according to the Center for American Progress, which profiled defaulters in 2017. Its report found that defaulters are more likely to be older, to be African American and to attend for-profit colleges. About half never finish their degrees. CAP discovered that, in 2017, the median defaulter borrowed a little more than $9,600, while borrowers who did not default took out almost twice as much at the median.
This notion is out of date. “Student debt is delaying progress for an entire generation,” said a Philadelphia Inquirer headline on May 21, referring to more-recent graduates. According to CBS News, “Millennials struggle under the burden of student loan debt.”
True enough, but boomers are increasingly in hot water, too, and they have retirements to fund. AARP reported this month that Americans over 50 owe almost $290 billion of the nation’s student loans, up from $47 billion 15 years ago. Among seniors, the number of indebted people, the amounts they owe and the percentage who are behind on payments all rose in the first half of the 2010s, according to the Consumer Financial Protection Bureau. Some of the growth comes from parents taking out what are called PLUS loans for their children’s educations: nearly $89 billion in total.
“I’m going to owe $100K by the time I graduate college,” Jacob Lopez, a junior economics major at Columbia, wrote in a recent Newark Star-Ledger op-ed. “Is it worth it?” The Gates Foundation has a new initiative aimed at answering just that question. And in an April survey by the financial website GoBanking Rates, 42 percent of Americans said that “their college degree wasn’t worth the student debt it created.”
Assuming he finishes his degree, Lopez has nothing to worry about. Economics is in the top 25 majors ranked by wages, according to Georgetown, with a midcareer salary of $117,800, according to PayScale. The firm also reports that a Columbia degree specifically is worth a 14 percent salary premium over the average grad.
Even if you’re not an Ivy Leaguer, odds are still pretty good that a college degree will pay off — as long as you finish. The College Board’s most recent Education Pays report found that the average bachelor’s degree recipient earns $61,400 annually, compared with $36,800 for someone with just a high school diploma. The average graduate, meanwhile, owes $28,650.
So let’s imagine that Jane, who goes right into the workforce after high school, earns $515,200 in her first 14 years. John, who spends four years in college, will earn $614,000 in his first 10 years, while repaying $38,000 or so in principal plus interest under a standard repayment plan. Now his loans are gone. He’s in the black, and the gains will only multiply over a several-decade career. And that calculation doesn’t include the social benefits of higher education, such as job creation, innovation, and even improved health and social stability.
Democratic presidential candidates like Elizabeth Warren and Bernie Sanders are promoting “billion-dollar plans to make college free on the campaign trail,” according to NBC News. They want to “erase student debt,” reports CNBC. And it’s true that the federal government could, in theory, cancel existing student loans. The Democrats just have to take control of the White House in 2020, recapture Congress and get rid of the filibuster so they can pass student debt relief over the opposition of Senate Republicans.
But it’s unclear what would happen to the student loan program going forward. Erasing the need for all student debt forever — “free college” — is beyond the power of the federal government alone. Warren’s and Sanders’s free-college proposals, which have the most details, require the federal government to spend more to incent public universities to forgo charging tuition in favor of other revenue schemes, including more state funding. But it would be up to states to decide whether to ante up the extra dollars. Given how many red states opted out of the Obamacare Medicaid expansion — a similar federal proposal that relied on state participation — it’s unlikely that a Democrat would get nationwide results with such a plan.