The voices of Urban Institute's researchers and staff
May 23, 2014

Borrowing for college: Is it better than the alternative?

May 23, 2014

Does borrowing for college open opportunities or does it leave students worse off than they would have been without the debt—and the education it helped them pay for? This question came to the fore again last week with the release of two new reports on student loans.

Before delving into the findings, let’s look at some explanations for why some people with bachelor’s degrees have debt and others don’t, even if they attend the same college.

Consider the stories of Mary and Susan: Both students have parents with similar incomes who contribute $15,000 toward a $25,000 annual tuition. But Mary has a rich Uncle Harvey who has doted on her since she was a tyke and happily pays the other $10,000 a year. Susan has to come up with the remaining $40,000 over four years herself.

Who winds up in a better financial situation? Who would be more likely to have saved for retirement and bought a house by the time she turns 30?

Maybe we need more Uncle Harveys. Or maybe governments should subsidize tuition more, lowering the bill for everyone. That would, of course, come with some sacrifices, involving either higher taxes or less government spending on something else.

While we wait for Uncle Harvey or Uncle Sam, we should think about the best options for current and potential students in the world we live in now.

A large wealth gap separates households who have student debt and those who don’t

In a new study on student debt and economic well-being, the Pew Research Center found that “households headed by a young, college-educated adult without any student debt obligations have about seven times the typical net worth ($64,700) of households headed by a young, college-educated adult with student debt ($8,700),” despite having similar incomes. This gap is about twice as large as the average total amount borrowed by the 70 percent of bachelor’s degrees recipients who graduate with debt.

As the authors of the Pew study point out, households with student debt also tend to have more credit card and auto debt. Could it be that the people who earned bachelor’s degrees without borrowing come from families able and willing to subsidize both college and  non-college expenses? Maybe some families pay for college and also help with down payments for homes, give generous birthday presents, and let their children keep the cars they inherited while in college?

The best way for young people not born to affluent parents to secure their own financial well-being is to go to college—and be savvy about it. They should make wise choices about where to go and what to study, borrow carefully and moderately, and finish their degrees. This is a tall order and many of the problems associated with education debt are the result of students making these decisions and working toward these goals without adequate information, advice, and support.

Less debt is better than more debt, but more education is better than less

The American Enterprise Institute, in a report issued last week, found no correlation between student debt levels and financial hardship. The study found that people with higher levels of education debt tend to have more education and tend to be in stronger positions financially. People with little earning power have precarious financial situations even without high student debt.

Given your level of education, having less debt leaves you better off. (Thanks, Uncle Harvey.) But, on the whole, people who complete more education are better off than those who complete less, even if they had to borrow to get that education.

Excessive student debt and inadequate provisions to help borrowers handle that debt lead to many very real problems. But discouraging students from investing in themselves, even when that investment depends on debt financing, is not the way to solve those problems. 

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