The growth of student debt raises some concerns, but not necessarily the ones we might think of. Total U.S. education related loans surpassed credit card debt in 2010, then topped auto loan debt in 2011 and hit the trillion dollar mark in 2012. It will likely reach $2 trillion by 2022. That's a huge number, causing some observers to warn that student loans could one day derail our entire economy. But we are still nowhere near the trillions of dollars in bad debt that fueled the subprime mortgage crisis, for example.
The overall debt figure also overstates the burden on individual borrowers. Despite horror stories about college students saddled with six-figure loans, their average debt at graduation in 2016 was about $37,000. That's an affordable amount, which most graduates should be able to repay within 10 years, based on their likely salary. Data shows that only one in six bachelor degree recipients is graduating with excessive debt, a figure that has been relatively constant for the last several decades. In-state public college tuition in particular remains an affordable option.
Debt levels do rise considerably for post-grad work. More than 90% of students who borrow more than $100,000 are graduate students, and about two thirds of medical students end up with six-figure debt. But their salaries are also typically much higher, which means they can better afford to make their loan payments.
It is also true that the number of students graduating with some debt is increasing. But students who complete their studies can generally manage that debt.
On the other hand, students who do not graduate or who do not go to college experience a greater degree of financial stress. Students who drop out of college earn less income than their peers who earn degrees and are four times more likely to default on their student loans. The lack of a college education remains a much bigger problem for young people than the debt incurred to get a degree.
Skeptics note that 30 to 35 percent of U.S. college graduates are living with their parents. But my research from a decade ago found the level was actually slightly higher back then, even before the 2008 financial crisis that plunged the economy into the Great Recession. Historically, it's not uncommon for graduates to go back home for several months while they search for jobs.
However, for low income students, rising college costs, including reliance on loans, can in fact have a chilling effect on enrollments. Imagine being told that you need to borrow more for your college education than your parents earn in a year. Low income students tend to be far more risk averse than middle and upper income students. Nobody loves having debt, but for low income students, the prospect can actually stop them from enrolling. Government grants and other support for higher education have decreased for decades on a per-student basis, making the path to college steadily more difficult for low income students.
This is a problem not just for those students, but for the broader U.S. economy and policymakers. U.S. unemployment reached a 16-year low in May 2017, but job growth has been so tepid that some economists now believe a shortage of workers is restraining GDP growth. Depending on who you ask, as many as 7 million jobs are going unfilled for a lack of qualified candidates. So there's certainly room to absorb more college graduates in high paying jobs.
Many politicians and commentators reject the notion of increasing education spending. Why should we cover college costs when it's the individual students who reap the benefits of their degree? That's missing the point. Higher education brings many public benefits as well. Some are harder to assign a direct dollar value - improved health, increased voting and civic participation, lower crime rates. But federal and state governments do reap a direct financial windfall from education. A person with a bachelor's degree or a more advanced education pays more than twice the federal income tax, on average, of someone with just a high school diploma. Over an average work life of 40 to 45 years, the increased income tax revenue is the equivalent of a 14 percent annualized return to the federal government. Not only is this a good investment, there is arguably no better investment.
Our overall student debt burden is manageable today. But if we see more students taking on unsustainable loans in coming years, we might very well have a student debt crisis down the road. That becomes more likely with each year that the federal government, and most state governments, fail to adequately invest in higher education. We should be doing a lot more to make college more affordable.
Mark Kantrowitz is a nationally-recognized expert on student financial aid, scholarships and student loans. He has testified before Congress and federal/state agencies about student aid on several occasions. Mark has written for the New York Times, Wall Street Journal, Washington Post, Reuters, Huffington Post, U.S. News & World Report, Money Magazine, Bottom Line/Personal, Forbes, Newsweek and Time Magazine. He was named a Money Hero by Money Magazine. He is the author of four bestselling books about scholarships and financial aid, including Twisdoms about Paying for College, Filing the FAFSA and Secrets to Winning a Scholarship.