With Kirk Heffelmire
When you see on the cover of the August 2016 issue of Consumer Reports the quote, “I KIND OF RUINED MY LIFE BY GOING TO COLLEGE,” you know the feasibility and practicality of financing a college education is on the minds of students and parents. Rightfully so. But before you reach the conclusion that going to college may not be worth your while, you may want to look at the data.
There are many myths about student loans that can do more harm than good. Myths that need to be dispelled to make sure students are not discouraged from pursuing degrees that will be paying off for them long after they’ve made their final loan payment.
The President’s Council of Economic Advisers recently published a report about the current state of student loan debt. The report consolidates a large amount of evidence and analysis to understand the $1.3 trillion in student debt that Americans has accumulated by 2015.
Let’s examine the misperceptions:
Myth #1: Growing student debt is eroding the value of going to college.
As discussed previously here, the returns on higher education are substantial and growing. Even when we consider rising students and the interest on student loans. The median bachelor’s degree holder will earn almost $1 million more over a career compared to a high school diploma holder. Also, higher education offers valuable protection against unemployment. See here.
Myth #2: The large balance of student loan debt is due to high tuition.
Tuition has been rising and this does contribute to increasing student debt. However, the national balance of student debt is growing in part because enrollment increased by 22 percent from 2004 to 2010. Student loans enable access to higher education that may not otherwise be possible. As shown here, there is a direct correlation between public funding for higher education and student loan debts. Tuition is an instrument rather than root cause of increasing student loan debt.
Myth #3: Very large loans are the norm for students.
The median amount of student loan debt when entering repayment has been rising over the last decade and reached $20,000 in fiscal year 2014. However, 42 percent of undergraduate borrowers owed less than $10,000, and just 10 percent had a loan balance greater than $40,000.
Myth #4: Students with the largest loans are having the hardest time paying them back.
The sad truth is that the highest default rates are among the borrowers with the lowest balances, which is often because they did not complete their degree and thus were not fully able to reap the benefit of their education. Two-thirds of all the defaults among the 2011 cohort entering repayment were on loans of less than $10,000.
Myth #5: Student loans are keeping young people from purchasing homes.
Getting a higher education is an investment that returns a higher salary, which makes home ownership more feasible compared to those without a degree. By age 26, those in households with student loan debt are actually more likely to buy a house compared to those who never attended college.
Overall, despite the sometimes frightening rhetoric, student loans remain a vital source of funds providing access to higher education. Although the reality is that student loan balances are at an all-time high, this also means students are investing in their future via higher education. Limiting access to student loans would not make young people better off: it would hurt their chances to advance economically.
Even so, there is ample room for caution while dispelling these myths because individual variation in taking student loans, completing a degree, and attending a quality institution may generate atypical but unbearable burdens. Student loans must be used wisely. The best advice? Attend a quality institution. Borrow only what you need. Complete your degree. Reap the benefits for decades.
When choosing a college, make sure you look at the average default rate of graduates. The information is readily available at the federal government College Scorecard website. I am proud that Mason has some of the lowest student loan default rates in the country.