The high cost of post-secondary education is getting a lot of attention because of the growing burden of college debt. The reality, however, is that the average levels of debt are not going to be a major challenge for most people who complete an undergraduate degree from a public university or college. About 78 percent of students who complete a 4-year degree at a public university have less than $30,000 in debt. There are lots of news stories about people with far more debt, but these are the exception.
The non-partisan Brookings Institute has an excellent breakdown of the distribution of college debt. Students tend to accrue higher levels of debt when they (1) attend a private college, and (2) pursue post-graduate education to obtain an MA, MS, or PhD or professional programs such as law school, medical school, and business school. Fully 40 percent of federal student loans are accrued by students in programs beyond the BA/BS. Also see here for more discussion. Graduates of professional degree programs from medical, law, or business schools tend to earn much more than people without these degrees. Similarly, those with graduate degrees in STEM fields enjoy commensurately higher incomes.
For most people, college debt is not unduly burdensome and borrowing to attend a good public university is likely to be a good investment. Higher debt levels tend to accrue to those with graduate degrees, which tend to provide higher incomes still. When I read articles that profile people struggling with an enormous burden of debt, the situations are typically the outlier cases. These make for compelling stories, but they are not representative. If you borrow heavily to get a PhD in medieval literature and work part-time as an adjunct professor, you are going to struggle.
College costs vs. outcomes
The first step in avoiding high levels of debt relative to post-graduate income is that families and students need to be better educated about the costs and outcomes associated with their educational choices.
There are free resources that show the cost effectiveness of educations for each university or college and area of study. The best standard measure that I have seen is Return On Investment (ROI) for degree program and school. The tool by Payscale.com (see previous link) analyzes the total wage income of people over the twenty years after they graduate. The ROI calculation starts by estimating how much more the college graduate has earned relative to someone with a high-school diploma only. The economic benefit of the college degree is the difference of the college graduate’s income over twenty years as compared to the high school graduates income over twenty four years (the extra four years of work during which the college students are still in school). The difference in earnings is then translated into the 20-year annual rate of return on the cost of college, which is equivalent to calculating how much you would have made if you had invested the cost of college rather than attending. These metrics are provided both with and without estimates of financial aid. There are many schools and degree programs that provide an amazingly high return on investment, such that the typical levels of debt are easy to service. Prospective students and parents will benefit greatly by spending time with this online tool both prior to applying to various schools and, subsequently, when choosing between schools and their offers of merit and need-based aid.
To start to address the challenge of paying for college, we need students and their families to be far better educated about the long-term implications of their decisions. Unless cost is no concern, families need to carefully consider the prospects for graduates by school and major. The simple reality is that some schools and majors, even with financial aid and merit awards, may be financially untenable.
One factor that is missing in the college ROI calculations is that more selective colleges and universities attract a higher percentage of students with high test scores, excellent grades, and other predictors of future success. Even so, as the famous studies by Professor Alan Krueger have demonstrated, the higher incomes enjoyed by graduates of highly selective schools appear to have little to do with the school and almost entirely to do with the students they attract. There are greater benefits to attending a ‘big name’ school if you are from an historically disadvantaged group, however.
Holding colleges accountable
We must create a system in which schools are held accountable or, at least, held up to public scrutiny if a meaningful fraction of graduates face unmanageable levels of debt. This is not a new idea. Attempts to create tools that measure colleges’ success rates are, thus far, mixed. There is simply no general agreement on what measure(s) should be tracked. If you look at the college ROI (Return On Investment) statistics and the ROI of a program at a college or university is less than zero, I’d say that this is a failing grade. This means that the 20-year increase in income of college graduates relative to high-school graduates is less than the cost of attending the school. Remarkably, there are many majors and schools that are projected to result in a negative ROI, even including financial aid. Schools offering majors with negative ROI should be required to clearly communicate this to prospective students.
Improving educational and career outcomes
The value of education is far more than the income that you can earn as a result. If you are going to spend your life struggling as a result of the costs of that education, however, it would be far better to know this beforehand. What’s more, the tools to figure out the economic implications are easily accessible and free. In today’s connected world, the solution to the high costs of many college programs is for students and families to be educated consumers. I am, of course, well aware of all of the social pressure to ignore costs and to attend the college with the beautiful leafy campus or with the prestige brand. Very few families can really afford to make educational choices independent of the costs, though.