College tuition is not the reason for student debt

One of the cornerstone issues of the Bernie Sanders campaign is free college for all. This part seems to have excited many young people or as they’re now referred to as millennials. I was in fact surprised that the free’ part extends to all students regardless of their household income so technically a household earning a million dollars can also send their kids to college for free even if they can afford it. Sanders plans to fund this free college’ scheme through a tax on Wall Street speculation. While I’ve never heard of numbers even in the ballpark range, this post is not about feasibility or economics of his campaign promise. This is primarily if making college free addresses the student debt problem that seems to be at the root of making such a promise.

First, I appreciate that Sanders is riding on the assumption that everyone should go to college. You’ll be surprised at the extent of the uncollege’ movement who advocate relying on watching YouTube videos 1 at home to educate yourself. College-educated adults earn significantly over their lifetimes than their peers who didn’t attend college.

Benefits of CollegeBenefits of College

As you notice, the unemployment rate for college graduates is far lower than those who didn’t attend college. Heck, even some college is better than no college. But is it worth the debt especially when two-thirds of bachelor’s degree recipients graduated with debt in 2008, compared with less than half in 1993. Last year, graduates who took out loans left college with an average of $24,000 in debt [source].” According to a College Board report, median earnings of bachelor’s degree recipients working full time year-round in 2011 were $56,500, or $21,100 more than the median earnings of high school graduates. So maybe going to college is a far better investment than owing a home mortgage but far more people do the latter than the former.

The fact that student loans as a whole is growing may not be a problem. It may just mean that more students are going to college and are utilizing a financial tool that helps them achieve that goal. College is still a good deal financially and add the spillover effects in terms of your contribution to society and generational benefits of wealth buildup, it may be the best thing you do. So how many people take student loans and how much?

With all that noise in the media about the crushing burden of student debt, just about 2 percent of millennials have more than $50K in debt. Almost half of the students never borrowed and probably received financial aid in form of scholarships or Pell Grants.

In the Democratic Town Hall yesterday, Hillary Clinton was asked a question on student debt by a young woman who was attending law school. Clinton immediately asked her if she graduated with an undergraduate degree with a debt. The woman said no. So she had taken a loan for graduate school, which is typical of most Americans 2. Among those who earn a master’s degree, 47 percent borrow more than $40,000, with 20 percent borrowing more than $80,000” [source]. Compare these statistics to the one for undergraduate school.

Now Bernie Sanders, I’m sure, is not planning on making law school free so his promise of making college free will solve a problem that no one has. Even if tuition is made free, people use student loans for other eligible things like room & board, fees 3, books & supplies, equipment (laptops, calculators, and even dorm necessities like microwave, refrigerator, lamps, etc.), and travel 4. I’m sure Bernie is not paying for that. The free college’ applies only for public universities so all those Facebook discussion on how Yale has become more expensive since 1974 are moot since private colleges will not be covered under his scheme.

We hear plenty of anecdotes about college graduates unable to pay off their student loans due to low-paying jobs after graduation. Without venturing into criticizing their choice of major and the subsequent jobs they take, what does the data tell us? Simply having a student debt is not a burden as long as you don’t default. So who are all these people who default on their debt? It surely must be the people who take on large amounts as debt.

Student Debt DefaultersStudent Debt Defaulters

Interesting. So the smaller the amount, the more likely you are to default? That almost seems counterintuitive. It turns out that it actually makes sense since people who tend to borrow more spend more time in college and in graduate or professional schools earning a degree that lands them in a higher-paying job.

Borrowing is highest for those who go to graduate school. Forty percent of new loans go to graduate students. Among those earning law and medical degrees in 2012, median debt (undergraduate and graduate school) is $141,000 for lawyers and $162,000 for doctors [source].

Again, Sanders is not making this education free so students will continue to borrow heavily for these degrees. The ones who default with less than $10K are the ones who dropped out of college. Without graduating, you’re only marginally better than a high school graduate and will definitely not be hired by people who seek at the minimum a college graduate. In fact, the heavy borrowers who attend graduate school, only 2 percent default on their loans. Think of someone who borrowed heavily to attend law school at a private university and then decided not to pursue a legal career. Perhaps he or she is pursuing a noble pursuit but someone’s gotta pay those loans back.

Now there are plenty of solutions to tackle the morass that is financial aid (perhaps in another post) and perhaps a better strategy would be to make college affordable by supplementing household savings or even making college expenses tax-exempt 5. But making college free’ by pursuing a tax on Wall Street speculation that’s highly unlikely to pass in a Congress that you don’t control and is increasingly obstructionist, is giving millions of students false hope. But then again, the alternatives don’t make for a sexy soundbite and for that, I understand Bernie Sanders. I #FeelTheBern of that dilemma.

  1. No, really! I heard this at SXSWedu.

  2. She was subsequently asked what interest rate she was paying. She responded by saying, hmmm…maybe 7-9%. How can you not know the exact interest rate you are paying on a loan that you seem to be so concerned about? I know down to the second decimal point the interest I’m paying on my home mortgage and my car.

  3. Fees for things like technology, library, recreation, etc. can quickly pile up. Even if full financial aid, I was expected to shell out more than $800-900 every semester for such fees in grad school.

  4. Guess what, all your trips back and forth from home and that study abroad semester in Paris can qualify.

  5. An idea proposed in The West Wing, as liberal as you can get TV show on politics.

February 24, 2016 · education · debt

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