Thursday, November 17, 2011

Student Debts Soaring

One of the key issues facing college-educated workforce in today’s job market in the United States is how to pay off student loans at a time when there are not many jobs out there and the ones that are mostly are not paying very well. The declining affordability of college is also making it more difficult for people from low-income households to achieve upward social mobility.

Tamar Lewin reports in “College Graduates’ Debt Burden Grew, Yet Again, in 2010” for the New York Times that around two-thirds of the students graduating from college in 2010 had taken students loans, and the average student loan was a massive $25,250. This average was 5% higher than was the case in 2009. The figure does not, however, include loans that parents took to pay for their children’s college education. Moreover, some colleges, including most for-profit colleges, did not report the student debt of their graduating class so the figure is likely to be even higher.

Students’ troubles were compounded by the fact that the graduating class had to deal with an unemployment rate exceeding 9%. The situation for the class of 2011 was hardly likely to be better. Mr. Kantrowitz, the publisher behind, told the NYT that students graduating from college in 2011 had an average debt of $27,200 or $34,000 if we include the loans their parents took for their education. Mr. Kantrowitz warned that among students from low-income backgrounds, “the canaries in the cage that squawk first,” fewer people are enrolling in 4-years college programs.

The report notes that the prevalence of soaring student loans has become an important issue in the Occupy protests we are seeing around the country as well as a political issue of late. Last month, President Obama  spelled out plans to ease student loans payment by allowing lower monthly payments to low-income individuals and a little lower interest rate to those who consolidate their loans. The measures are important because, as the report notes, federal student loans offer more protection than private loans, and options like income-based repayment and unemployment deferment can ease the burden of student loans.

At a time of fast rising tuition fees at many universities, it is not entirely surprising that students are now taking more loans than even before. With rising tuition and student debts and a sluggish economy, the opportunity cost of college education is rising. And since an undergraduate degree no longer offers the same returns as it once did, more people now also feel compelled to get Masters degrees, which translate into more loans. College education, however, still has much value. College-educated workers, after all, earn more in their lifetime, get higher-status jobs and face lower unemployment rate than those without a college degree, and there is less variation in unemployment between periods of economic expansion and recession for college-educated workers.

Most worryingly, as Mr. Kantrowitz warned in the article, it is mainly people from low-income families who are putting off their plans for college because of the declining affordability of college. Already just 3% of the students attending the country’s 146 top ranked colleges come from families in the bottom 25% of the household income distribution. This is not good because a college degree is important for upward social mobility. Steven Greenhouse writes in his book, The Big Squeeze, that students from low-income households with high test scores have a 29% chance of graduating from college as opposed to 74% for students from high-income backgrounds with similar high-test scores (41). A college degree often acts as a signal of applicants' ability to employers but because students from low-income households face more constraints to graduating from college, many are struck with lower-paying jobs than those with a college degree of similar ability (as indicated, for example, by their similar test scores). Thus we need more generous grants and less costly loans so that students from families that are not financially well-off can have a better chance of graduating from college and becoming upwardly mobile.