Student debt is a major problem today for the younger generation, and it has become a significant campaign issue. A recent op-ed by Susan Dynarski in the New York Times changed my perspective on the issue of student debt.
Let’s consider the basic numbers. Politicians often cite two numbers: one trillion and seven million. Student borrowers owe more than $1 trillion. Seven million of these borrowers are in default. It is tempting to connect these two facts and conclude that more debt leads to more default. That is not the case.
It turns out that the biggest borrowers tend to become the highest earners. Students with the smallest debts are the ones who actually have a bigger problem paying it back.
For example, borrowing is the highest for people who go to graduate school. Forty percent of new loans go to graduate students. Those who graduate from medical school or law school generally have high salaries and are therefore able to pay back their student loans. Their percentage of default is much lower than for other students who took out loans for college.
Even college graduates do fairly well in repaying their loans. The typical college graduate earns tens of thousands of dollars more each year than the typical high school graduate. Their default percentage is relatively low as well.
The highest percentage of student defaults are concentrated among the millions of students who go to college but drop out before they get a degree. They have smaller debts than many of the other students I have mentioned, but they also have the highest rate of default on student loans.
There is a policy application to these numbers. We shouldn’t be trying to get all students to borrow less. Those going to graduate school or planning to graduate with a marketable degree are a much lower risk. This is an important fact to keep in mind when politicians talk about student debt and even propose free tuition.