Student Debt Does Not Pay for Itself

Today’s $1.5 trillion student debt crisis is “crushing” American households, writes Noah Smith for Bloomberg.

The U.S. student loan program is driven by commonplace assumptions that have cemented the idea that higher education is an essential pathway to economic security, regardless of how much it costs. Because media, economists, and borrowers themselves believe that more degrees lead to more income—higher education is the ladder to the middle class, they say—too many Americans, including policymakers, think that student debt is not a serious problem.

In a recent paper, Roosevelt’s Julie Margetta Morgan and Marshall Steinbaum challenge today’s conventional “wisdom,” which, embedded in the public debate and academic literature, is propelling the pursuit of higher education.

When we talk about student debt, we most often talk about it as a tool for providing access to college. As such, we fail to consider the ways that debt plays into the systemic barriers that are built into our economy. Morgan and Steinbaum examine the relationship between student debt and labor market outcomes, and highlight the flaws in conventional assumptions about the role of debt in higher education.

Higher education experts focus too squarely on the college earnings premium—the difference between the earnings of those with a high school diploma and those with advanced education—ignoring important trends in earnings by education level.

Though many people are furthering their credentials—the size of student debt has more than doubled since 2006—more education has not led to higher earnings. Higher education experts highlight the college earnings premium as evidence that student debt will pay off. But the earnings premium obscures the fact that wages for those with a high school diploma have fallen significantly, while those for college graduates are merely stagnant. In other words, students are taking on increasing debt for the same or lower wages than what others had achieved a generation ago.

What’s more, employers, who hold runaway power in the labor market, are asking for more on workers’ résumés without providing better pay and competitive benefits. This trend, known as credentialization, is compounded for Black and brown Americans, who already must pursue more education than their peers for the same or similar jobs.

Researchers have missed troubling changes in repayment patterns and borrower demographics.

To investigate the burden of student loan debt, researchers have looked to changes in monthly loan payments over time. These studies have concluded that, since monthly payments have not changed, neither has the burden of debt. Morgan and Steinbaum show that this conclusion overlooks crucial factors, like the increase in borrowers who have student debt but are not making payments, as well as the lengthening of repayment terms.

What’s more, who is taking on debt is much different than previous generations. Borrowers increasingly attend for-profit and community colleges, and these students, who are older and have fewer resources (less generational wealth, for example), are more likely to fall behind on what is owed. “If poor kids’ economic futures are being crushed by debt, while rich kids remain relatively unencumbered, the student loan system isn’t exactly providing the disadvantaged with a leg up,” says Smith.

The student debt crisis, set against the backdrop of a high-profit, low-wage economy, is crippling Americans and any chance they might have to get ahead. Morgan and Steinbaum show that it’s absolutely crucial that we rectify the rules and institutions that fuel it, including a rigged student loan program and a labor market structured to disadvantage workers. However, we must also change the way that we understand and approach the system, too. If higher education is the cost of a more enriched life, it currently comes at too high of a price.