The Surprising Good News About Student Debt
For most grads, it’s entirely manageable and a degree greatly boosts income
There are more than a trillion reasons why student loan relief got so much attention in the recently concluded Democratic presidential primary season. Total student loan borrowing reached $1.51 trillion at the end of 2019, more than double the amount a decade earlier.
Yet while student debt has been elevated to national crisis status, engendering proposals to forgive much of the debt, you don’t hear a similar outcry over car loans, which also nearly doubled over the past 10 years to more than $1.3 trillion.
That’s a head-scratcher: A college degree delivers a profound financial advantage over a lifetime; the value of a new car drops by 40% to 50% within three years, and keeps falling from there.
A Federal Reserve study looked at median annual household earnings from 1989 through 2016. Income of households in which at least one member had a bachelor’s degree was consistently 100% higher than households without one. This so-called “college income premium” is around 175% in households with a graduate degree.
There’s also the fact that people with college degrees live longer, tend to experience better health along the way, and are more likely to own a home and less likely to be divorced.
So, while $1.5 trillion is a troubling figure — and too many students and their families have borrowed excessive amounts for an education that will never pay for itself — most student borrowers do not suffer crippling hardship.
The most recent student loan data available says that among bachelor’s degree recipients who borrowed for school, the average total loan amount taken out by the student was around $31,000 at graduation. For a public four-year school the average is around $28,000.
The four-year degree debt totals might seem surprisingly manageable given headlines that college “costs” $40,000 to $50,000 or more a year. But that’s the list price. A college’s net price, after all aid is taken into account, is typically 45% lower. That’s not to say everyone pays the net price; as a family, you want to focus on schools where your kid will be likely to qualify for the most aid.
Let’s go back to car loans vs. college debt. Consumer data firm Experian reported that in mid-2019 the average millennial with a car loan owed more than $18,000. Let’s assume that was for a used car, because a cash-strapped millennial knows that a used car is the better financial move.
The average used car loan is for 65 months, and with a good credit score the interest rate might be 5%; that works out to a monthly payment of about $315.
The “standard” repayment period for federal student loans is 10 years, though many borrowers take even longer. Let’s stick with 10 years. The monthly payment based on current federal loan rates will be about $322 for someone graduating from a private, nonprofit four-year school, and less than $300 for the average public four-year graduate who took on debt.
Sure, it takes longer to pay off student debt, but you don’t keep taking out new student loans every five to 10 years, as is common when trading in cars.
A rule of thumb from college financial expert Mark Kantrowitz, publisher of Savingforcollege.com, is that a borrower who keeps total debt to no more than what they expect to earn in the first year out of school will be able to pay back the debt on a 10-year schedule, without needing to earmark more than 10% of income.
The average starting salary for bachelor’s degree recipients last year was more than $50,000, more than the average debt balance. And the PayScale.com website has a searchable database of starting salaries for specific jobs.
Another resource you might want to check out provides an estimate of the return on investment students earn over 10, 15, 20, 30 and 40 years, based on median salaries of graduates, taking median debt into account. The Center on Education in the Workforce at Georgetown University has estimates for more than 4,500 schools in a free database. (A web search of “Center on Education in the Workforce ROI” will lead you there.)
The net present value over 40 years of a Stanford University education comes in at $2 million. Montana State University in Billings is one of the schools with a 40-year return around the median of the 4,500 schools, at $723,000. Still not too shabby.
While the national debate continues on whether college education should require any debt, here in the real world of today, households with college-age children must work within the system as it is currently constructed. If student borrowing is necessary, borrow smart.
Focus on schools where your net price will be manageable, and that means aiming for a general target that your kid will emerge from school with total borrowing less than what they will likely earn their first year out of school.