Student loans: Do college students borrow too much — or not enough?

Education costs (iStock)

As the United States struggles to recover from the Great Recession of 2007-09, many would-be students remain optimistic about their professional futures. Some question the wisdom of assuming substantial debt to earn a college degree, however, especially when jobs for young people remain relatively scarce. As of 2012, the average debt load was $25,000 for a graduating senior, with a median figure of about $13,000. But high school graduates earn about $20,000 less than college graduates in terms of median annual income, according to Census figures.

A 2012 study from Harvard University and the University of Virginia published in the Journal of Economic Perspectives, “Student Loans: Do College Students Borrow Too Much — or Not Enough?” examined data on student loans in the United States, including broad trends in borrowing over time and optimal loan amounts based on course of study and institution.

Key study findings include:

  • On average, college education increases total life earnings: In 2012 figures, “the college graduate would have compiled a total of approximately $1.2 million in earnings net of tuition at age 64 as opposed to approximately $780,000 in total earnings for the high school graduate.” This gap was approximately $200,000 from 1965-85 but steadily increased by 1985 to the current gap of more than $400,000.
  • For the average student, a standard ratio of 8-10% loan burden to average post-graduation income has remained relatively stable: “To put this in perspective, an individual with $20,000 in student loans could expect a monthly payment of about $212, assuming a ten-year repayment period. In order for this payment to accrue to 10 percent of income, the student would need an annual income of about $25,456, which is certainly within the range of expected early-career wages for college graduates.”
  • “Students who have chosen a technical field — in the broad categories of computer science, engineering, and math — tend to earn more than the average and more than those with education or humanities undergraduate concentrations.” A 2008 graduate with a concentration in computer science or engineering can expect total earnings of more than $1,800,000; his or her classmate who majored in education can expect to earn or 61% less, or approximately $1,100,000.
  • As of November 2011, the “unemployment rate for college graduates (including those with advanced degrees) was 4.4%, while high school graduates faced an unemployment rate of 8.5% and those with collegiate attainment less than a B.A. faced an unemployment rate of 7.6%.”
  • The percentage of undergraduates taking out any type of debt for school has grown in the last 20 years, from 19% in 1989-90 to 35% in 2007-08. Over the period 1960-80, the U.S. government distributed more grant monies than loans; after 1980, loans steadily increased while grants stagnated until a recent — and significant — increase in 2009.
  • Private-sector borrowing to finance higher education has increased significantly in recent years: “Private sector loans were about $1.5 billion (constant 2009 dollars) in 1995-96 [and] grew to $21.8 billion by 2007-08, representing about 20% of all loan funds.”

The researchers note that while most students will see a high return on their investment in college, incurring debt “is also a lottery with significant probabilities of both larger positive, and smaller or even negative, returns.” They advise students to carefully consider borrowing limits by evaluating how previous students on a similar path have fared economically and professionally.

In related research, a 2012 Federal Reserve Bank of New York study notes that “about one-quarter of borrowers owe more than $28,000; about 10 percent of borrowers owe more than $54,000. The proportion of borrowers who owe more than $100,000 is 3.1 percent, and 0.45 percent of borrowers, or 167,000 people, owe more than $200,000.”

Tags: higher education, campaign issue, metastudy, student loans

Last updated: May 1, 2012


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Citation: Avery, Christopher; Turner, Sarah. "Student Loans: Do College Students Borrow Too Much -- Or Not Enough?," Journal of Economic Perspectives, Winter 2012, Vol. 26, No. 1, 165-192.