Before you go thinking that this is the typical conservative blog post about moral hazard and personal responsibility, it’s not. It’s about the payoff of attending college and taking another look at the popular narrative of the “student loan crisis”.
I am not a fan of the cost of college. As I have posted previously, I think that much of the cost of college goes towards what I call the industrial college complex. This behemoth is focused on competing for students and shuffling them through the doors while extracting as much as they can from them in order attract even more students.
In fact, some economic research has been done pointing to the fact that college may really add no value for many people in terms of what they take away from it outside of the extra earnings it usually confers. Rather, a degree just serves as a social signal that someone is competent for professional work, the actual skills they learned from that degree are often irrelevant to the job they end up working. Just ask an analyst at an investment bank who ends up formatting pitches in power point for 95% of her day for $140,000 a year.
The Privilege Bubble
When we spend too much time in a bubble, we really lose sight of the wider picture. If you are in a privileged bubble, you lose sight of how privileged you are very quickly.
Case in point, a discussion I was having recently about student debt. I was told by a friend that my blog was recommended to a grad student who was still attending school. That student was upset by one of my posts, I don’t know which one, about being prepared for something like the pandemic by having something saved. This person then expressed that they were upset by this because she was a poor student who couldn’t save and had $60,000 in debt. Someone out of touch like me is tone deaf and doesn’t understand her struggle.
This blog isn’t for everyone and it isn’t for everyone at any stage in their life. As a former student, I have a bit of an understanding of how this person feels. I was fortunate enough to come out of college with no debt due to my parent’s diligent saving and scholarships I received. Not everyone is so lucky. At the time however, I was still frustrated I had no money and I was desperate to get to work to try and earn some. It must feel like even more of a weight on your shoulders to be starting from a negative net worth.
With time, experience and perspective though, I can see that those fears were overblown. If we step back and look at the totality of earnings over our lifetimes, $60,000 is a pittance. The median masters student makes $1.15 million more over their lifetime compared to the median high school grad, even when you control for socio demographic factors like gender and race. Even if you are middle of the road, this is 75% more than the earnings of someone without your education.
Note: The net earnings control for socio-demographic variables
To see why college, even if you have to amass debt to attend is still worth it, it helps to do a brief thought experiment. If we assume that $60,000 isn’t paid off for 40 years and grows at a 5% interest rate, this would mean it will have grown to about $422,000 in 40 years. Almost a third of what was earned over that time if we assume this person made the median wage for someone with a masters degree. This means even if the loan payment is deferred with 5% annual interest accumulating over 40 years, the investment still pays off almost 3 times over.
Even if we look beyond my personal heuristics, the figures show that there isn’t much of a student debt crisis, not yet at least. The median debt of all student loan borrowers is around $17,000 and varies considerably by educational attainment level.
If we look at those that end up defaulting, the picture is different than much of what the media portrays. The image conferred to us in the media is that of a liberal arts college grad who has six figure debt and is struggling to find a job. Surely these people exist but the statistics show that they are not the norm.
Six figure student debt usually comes with six figure salaries. These tend to be PhD’s, MBA’s and law degree recipients. To get a sense of where student loans are actually hurting people, it may help to look at the profile of those who have actually defaulted. Of those defaulting, half of them are people that didn’t finish school and the median amount they default on, around $9,600, are around half the median student loan balance.
About half of young college graduates with student loans (52%) live in families earning at least $75,000, compared with 18% of those without a bachelor’s degree.
Additionally, some of the biggest disparities in wealth are not developing just between older Americans and younger ones but between millennials themselves. The gap now between the earnings of someone with a bachelors degree and those with a high school degree in the age range of 25-32 is greater than any generation that came before.
Source: Pew Research
Like many examples of inequality which I have examined on this blog, the inequality is exacerbated when we look beyond income to net worth. Surveys tend to consistently find that median net worth of those with a college education is over four times that of someone who only completed high school.
Source: Of Dollars and Data
Lessons From Africa
One of the things I am thankful for in my studies and in my experience is to have spent a good amount of time abroad and realizing how extremely privileged not only I am but those around me are. I was reminded of this last year when I attended an investment conference for South Africa that featured the head of the central bank and the Minister of Public Enterprises, among others.
South African Airways (SAA), a state owned airline has been struggling for many years and one attendee asked if the state would be allocating funds to save the airlines. The minister answered that it was not likely that the state would be pitching in to help SAA for a very simple reason: only rich people fly. In a place like South Africa, where GDP per capita is $6,374 and there is a wide wealth gap, only the relatively wealthy can afford to pay hundreds or thousands of dollars to fly somewhere. The minister asked, why should the state bail out a corporation that caters to the wealthy and only the wealthy use?
This reminded me of the statistics I had seen of college graduates earning more and having much greater net worth than those that didn’t finish or didn’t attend. It seems almost irresponsible for politicians to be advocating for the forgiveness of student debt because, as I have shown above, this will be a giveaway to the middle and upper middle class. In fact, given the income and wealth disparity we already have, it may make the already wide disparities even worse.
A better, more focused solution may be to focus on those that get scammed by for profit “colleges” or those that didn’t finish. These people end up being burdened by debt which they don’t have the income potential to ever pay off.
Another question this raises is why is there so much focus on student debt within the media and society at large given that most college grads will do just fine and likely better than most of the rest of the population?
One potential answer to this would be to look at who is making the fuss about student loans. The mainstream media has been fixated on this topic for years, but could there be a selfish reason they are so focused on this issue? Most journalists at major publications and news outlets are already highly educated people. Almost all have bachelors degrees if not masters degrees and likely run in circles, both socially and work wise, with other highly educated people. However this particular segment of the workforce has not been doing well in the past 20 years as their industry is being upended by the digital revolution.
Newsroom employment has fallen by half over the past 10 years as people switch from traditional newspapers and TV to other more digital news sources. This wouldn’t be an issue if journalists just switched over to the new news mediums from the traditional ones. But at the same time, employment at the other media outlets has only increase by around 23% over the same period, not nearly enough to make up for the difference. When there are fewer jobs to go around with a similar number of journalists looking for work, it puts downward pressure on wages and likely decreases earnings for those in the media.
At the same time, college costs have continued to increase. The likelihood that you will find a journalist, who is under employed, underpaid and burdened with student debt is probably pretty good. The debt and low pay are also likely exacerbated in those who are new hires and covering their peers, i.e. other young people. What are they going to gravitate towards? People who share their own problems, likely low pay and student debt. This could put a microscope on what is more of an industry problem and make it seem as if it’s a wider societal problem.
To take it one step further, you could argue that the politicians, the media and those that tend to consume the media, tend to be dominated by college grads. So if some of them feel debt burdened, the echo chamber of power just reverberates around their own social, work and power structures to reinforce what they already want to believe about student debt.
Conclusion
Like any amount of debt, attacking the problem and creating a plan can help you tackle the problem sooner rather than having it longer. I may not have had the student debt of others but I can’t help but chuckle at the sums people complain about when I look at my mortgage debt, child support, and divorce settlement in comparison. You won’t find me asking for relief though, I take my own medicine, take responsibility for my debts and have started my plan to tackle them and move forward. The government isn’t going to save us, so we’d better just formulate a plan to tackle debt and get to work.
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