Student debt crisis? What student debt crisis?

Dec 18, JDN 2457741
As of this writing, I have over $99,000 in student loans. This is a good thing. It means that I was able to pay for my four years of college, and two years of a master’s program, in order to be able to start this coming five years of a PhD. When I have concluded these eleven years of postgraduate education and incurred six times the world per-capita income in debt, what then will become of me? Will I be left to live on the streets, destitute and overwhelmed by debt?

No. I’ll have a PhD. The average lifetime income of individuals with PhDs in the United States is $3.4 million. Indeed, the median annual income for economists in the US is almost exactly what I currently owe in debt—so if I save well, I could very well pay it off in just a few years. With an advanced degree in economics like mine, or similarly high-paying fields such as physics, medicine, and law one can expect the higher end of that scale, $4 million or more; with a degree in a less-lucrative field such as art, literature, history, or philosophy, one would have to settle for “only” say $3 million. The average lifetime income in the US for someone without any college education is only $1.2 million. So even in literature or history, a PhD is worth about $2 million in future income.

On average, an additional year of college results in a gain in lifetime future earnings of about 15% to 20%. Even when you adjust for interest rates and temporal discounting, this is a rate of return that would make any stock trader envious.

Fitting the law of diminishing returns, the rates of return on education in poor countries are even larger, often mind-bogglingly huge; the increase in lifetime income from a year of college education in Botswana was estimated at 38%. This implies that someone who graduates from college in Botswana earns four times as much money as someone who only finished high school.

We who pay $100,000 to receive an additional $2 to $3 million can hardly be called unfortunate.

Indeed, we are mind-bogglingly fortunate; we have been given an opportunity to better ourselves and the society we live in that is all but unprecedented in human history granted only to a privileged few even today. Right now, only about half of adults in the most educated countries in the world (Canada, Russia, Israel, Japan, Luxembourg, South Korea, and the United States) ever go to college. Only 30% of Americans ever earn a bachelor’s degree, and as recently as 1975 that figure was only 20%. Worldwide, the majority of people never graduate from high school. The average length of schooling in developing countries today is six yearsthat is, sixth grade—and this is an enormous improvement from the two years of average schooling found in developing countries in 1950.

If we look a bit further back in history, the improvements in education are even more staggering. In the United States in 1910, only 13.5% of people graduated high school, and only 2.7% completed a bachelor’s degree. There was no student debt crisis then, to be sure—because there were no college students.

Indeed, I have been underestimating the benefits of education thus far, because education is both a public and private good. The figures I’ve just given have been only the private financial return on education—the additional income received by an individual because they went to college. But there is also a non-financial return, such as the benefits of working in a more appealing or exciting career and the benefits of learning for its own sake. The reason so many people do go into history and literature instead of economics and physics very likely has to do with valuing these other aspects of education as highly as or even more highly than financial income, and it is entirely rational for people to do so. (An interesting survey question I’ve alas never seen asked: “How much money would we have to give you right now to convince you to quit working in philosophy for the rest of your life?”)

Yet even more important is the public return on education, the increased productivity and prosperity of our society as a result of greater education—and these returns are enormous. For every $1 spent on education in the US, the economy grows by an estimated $1.50. Public returns on college education worldwide are on the order of 10%-20% per year of education. This is over and above the 15-20% return already being made by the individuals going to school. This means that raising the average level of education in a country by just one year raises that country’s income by between 25% and 40%.

Indeed, perhaps the simplest way to understand the enormous social benefits of education is to note the strong correlation between education level and income level. This graph comes from the UN Human Development Report Data Explorer; it plots the HDI education index (which ranges from 0, least educated, to 1, most educated) and the per-capita GDP at purchasing power parity (on a log scale, so that each increment corresponds to a proportional increase in GDP); as you can see, educated countries tend to be rich countries, and vice-versa.

hdi_education_income_labeled

Of course, income drives education just as education drives income. But more detailed econometric studies generally (though not without some controversy) show the same basic result: The more educated a country’s people become, the richer that country becomes.

And indeed, the United States is a spectacularly rich country. The figure of “$1 trillion in college debt” sounds alarming (and has been used to such effect in many a news article, ranging from the New York Daily News, Slate, and POLITICO to USA Today and CNN all the way to Bloomberg, MarketWatch, and Business Insider, and even getting support from the Consumer Financial Protection Bureau and The Federal Reserve Bank of New York).

But the United States has a total GDP of over $18.6 trillion, and total net wealth somewhere around $84 trillion. Is it really so alarming that our nation’s most important investment would result in debt of less than two percent of our total nation’s wealth? Democracy Now asks who is getting rich off of $1.3 trillion in student debt? All of us—the students especially.

In fact, the probability of defaulting on student loans is inversely proportional to the amount of loans a student has. Students with over $100,000 in student debt default only 18% of the time, while students with less than $5,000 in student debt default 34% of the time. This should be shocking to those who think that we have a crisis of too much student debt; if student debt were an excess burden that is imposed upon us for little gain, default rates should rise as borrowing amounts increase, as we observe, for example, with credit cards: there is a positive correlation between carrying higher balances and being more likely to default. (This also raises doubts about the argument that higher debt loads should carry higher interest rates—why, if the default rate doesn’t go up?) But it makes perfect sense if you realize that college is an investment—indeed, almost certainly both the most profitable and the most socially responsible investment most people will ever have the opportunity to make. More debt means you had access to more credit to make a larger investment—and therefore your payoff was greater and you were more likely to be able to repay the debt.

Yes, job prospects were bad for college graduates right after the Great Recession—because it was right after the Great Recession, and job prospects were bad for everyone. Indeed, the unemployment rate for people with college degrees was substantially lower than for those without college degrees, all the way through the Second Depression. The New York Times has a nice little gadget where you can estimate the unemployment rate for college graduates; my hint for you is that I just said it’s lower, and I still guessed too high. There was variation across fields, of course; unsurprisingly computer science majors did extremely well and humanities majors did rather poorly. Underemployment was a big problem, but again, clearly because of the recession, not because going to college was a mistake. In fact, unemployment for college graduates (about 9%) has always been so much lower than unemployment for high school dropouts that the maximum unemployment rate for young college graduates is less than the minimum unemployment rate for young high school graduates (10%) over the entire period since the year 2000. Young high school dropouts have fared even worse; their minimum unemployment rate since 2000 was 18%, while their maximum was a terrifying Great Depression-level of 32%. Education isn’t just a good investment—it’s an astonishingly good investment.

There are a lot of things worth panicking about, now that Trump has been elected President. But student debt isn’t one of them. This is a very smart investment, made with a reasonable portion of our nation’s wealth. If you have student debt like I do, make sure you have enough—or otherwise you might not be able to pay it back.

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