Does Student Debt Really Matter?

IOU.jpgIn a recent essay in The Atlantic, Andrew Hacker and Claudia Dreifus lament that most students have to take out college loans. They write: “At colleges lacking rich endowments, budgeting is based on turning a generation of young people into debtors.”

While Hacker and Dreifus blame the universities for encouraging students to take on more debt to pay for lavish facilities and other non-educational amenities, others focus on student debt itself as perhaps the key barrier to college facing millions of students from families with low and modest incomes. Indeed, entire organizations have been founded on that very notion, such as the Project On Student Debt.

Analysts who belong to the debt-is-bad school of financial aid policy are correct in noting that student borrowing increased dramatically in the past decade, ballooning 128 percent to more than $96 billion, according to the College Board’s annual survey of financial aid trends. On the other hand, federal grants and institutional grants mitigated the rising student debt. From 2000 to 2010, federal financial aid shot up 136 percent to more than $146 billion; and institutional grants rose 69 percent to more than $33 billion.

The fact that colleges and universities increasingly depend on students going into debt to pay for higher education has important consequences for families. For example, in 1970, about 21 percent of students in the bottom income quartile completed the BA degree by age 24, according to Postsecondary Education Opportunity.  Almost 40 years later, unlikely as it may seem, that statistic has remained unchanged. Even for students in the second-income quartile, completion rates hardly budged, from 23 percent to 27 percent in 40 years’ time.

By contrast, students from wealthier families saw much greater success. Twenty six percent of students from the third highest quartile of family income completed degrees in 1970. By 2008, 48 percent did so. At the top quartile of family income, completion rates rose dramatically, from 54 percent to 95 percent.

Money Matters                                                 

college-costs.jpgClearly, money matters, and the influence of money in this equation has become even more pronounced in recent years. A somewhat dysfunctional financial aid system worsens the problem. Strange as it may seem, lower-income students do not receive loans and aid in amounts large enough to make a difference. For instance, families earning at least $281,000 a year received total financial aid packages in 2008 worth an average of almost $7,000. Students from families in the modest income range of $60,000 to $69,000 received aid averaging about $10,169, a small gap considering the vast differences in income. 

The financial aid system gets even weirder. While low-income students must go further into debt, affluent students get an extra bonus: they receive more “merit” aid than poorer students, in the form of institutional grants. According to a 2007-2008 National Postsecondary Student Aid Study, 34 percent of students from families earning $105,000 or more received merit grants of $8,000 and higher. These affluent families also received the highest percentage of merit grants in the range of $3,800-$7,999. By contrast, lower-income students do receive merit grants but in far smaller amounts than wealthier students. About 26 percent of the merit grants to low-income students were in the smallest amounts, ranging from $1 to $1,500. Among students from high-income families, just 14 percent of merit grants were in the lowest range.

The burden of greater debt matters, particularly for students from families who would not be able to afford college without going into debt. But organizations and many education experts, as a matter of ethics and equitability, seem to scorn the notion that more families need to take on greater debt to pay for a daughter or son’s higher education.

For the public good in this post-industrial society, the BA degree is probably the new high school diploma and therefore deserves full public support, just as K-12 schooling does. Collectively, however, we insist on thinking that higher education should be a choice made by individuals and families. This is not a matter of consumer choice. Let’s be accurate: it’s an investment decision. 

High Debt Versus Low Debt

Here’s a key question I have been examining: how much does student debt matter to education outcomes? First, I took the list of “high debt” states according to data compiled by the Project on Student Debt, and then compared these states in terms of the following factors: the percentage of college graduates with debt; students’ share of college costs after state subsidies; the college participation of low-income students in a given state; the percentage of students who complete college in four years; state funding per $1,000 in state personal income; and finally, the percentage change in state funding per $1,000 in personal income from 2001 through 2011.

I expected to find that low-income students in high-debt states would have relatively low college participation; that students would pay a larger percentage of college costs owing to declining state subsidies; and I expected relatively low college completion rates.

The high-debt states included Vermont, Pennsylvania, New Hampshire, Rhode Island, Maine, Minnesota, Ohio, Iowa, and Alaska. Graduating college seniors in these states (in the class of 2009) averaged $27,616 in debt upon graduation, significantly higher than the U.S. average of $24,000. Some 67 percent of students at public universities in these states graduated with debt, compared to 62 percent at public universities nationwide.

As one might expect, the amount of state higher-education funding for every $1,000 in state personal income was relatively low in these high-debt states. What’s more, the percentage change in state funding relative to personal income fell 30 percent from 2001 through 2011, a dramatic decline compared to the average decline of 18 percent for all states.

In terms of educational outcomes, however, these high-debt states actually fared pretty well. Consider Vermont, where students graduated with an average debt of nearly $28,000. Vermont students paid 83 percent of the costs of college compared to a national average of 63 percent; state funding relative to state wealth was very low, about $3.79, and public funding of higher education relative to state wealth declined 11 percent in ten years, which was significantly less than funding declines among other high-debt states.

Despite all these negative factors that would seem to harm Vermont’s educational success, just the opposite occurred in some cases. Almost 35 percent of Vermont’s low-income students participated in college; the state’s four-year graduation rate among matriculating 9th graders was 17 percent. That was significantly lower than the U.S. average but the highest rate of college completion among the high-debt states. What’s more, 41 percent of Vermont adults ages 25 to 34 had competed BA degrees or higher, versus 30 percent for the nation.

What, then, about the states in which students graduated with relatively low amounts of debt? According to the “debt is bad” theory, such states should have superior educational outcomes compared to high-debt states. The low-debt states included Utah, Georgia, Nevada, Wyoming, Delaware, California, Arizona, Kentucky, Louisiana, and Washington. Indeed, students graduated with just $17,374 in debt– some $10,000 less than students in high-debt states. Only half the students in these low-debt states graduated with any educational debt. State funding relative to state personal income was high, about $7.50. And, the 10-year decline in state funding was significantly less than decline for the high-debt states.

All these factors would suggest that the low-debt states would have stellar educational outcomes. And yet, college participation of low-income students was low, just 17 percent, which was about half  the rate in the high-debt states.  Just 6 percent of matriculating 9th graders in the low-debt states went on to graduate college in four years. About 33 percent of adults in these states earned at least a BA degree, slightly better than the U.S. average–but significantly less than BA attainment in the high-debt states.

College Participation of Low-Income Students

In my second analysis, I ranked the top 17 states in terms of college participation of low-income students. This list ranged from New Hampshire’s 44 percent low-income participation to Maryland’s 31 percent. On average, these states were very similar to national norms regarding debt levels, student share of education costs, state funding, and the percent of graduating seniors with debt.

What really distinguished these states as a whole from national norms were educational outcomes. Besides high rates of low-income participation, the rate of BA attainment was significantly higher than the U.S. average (43 percent versus the U.S. average of 30 percent.) Curiously, however, these states fell far short of the national average in terms of the percentage of 9th graders who eventually earned BA degree in four years –13 percent compared to a national average of 28 percent.

On the whole, then, the evidence in support of the “Debt Matters” argument appears weak, particularly if we are concerned about state performance on important educational measures. High-debt states seem to defy the notion that dwindling state support, rising tuitions, and rising student debt inevitably leads to inferior educational outcomes. On the other hand, students in the low-debt states indeed graduated with far less debt than their peers nationwide. But, most of these low-debt states had terrible educational outcomes, including an embarrassingly low average college completion rate of just 6 percent.

What accounts for this seemingly contradictory picture: graduating with high debt does not necessarily lead to bad educational outcomes?

In my final analysis, I reconciled the contradiction about high-debt versus low debt by taking into account states’ overall economic well being.  When states are richer and people have relatively high-paying jobs, then families might be willing to take on relatively more debt because they figure that the investment will be worthwhile.  Because of financial constraints, poor people rarely invest in housing, business enterprises – or higher education. So it seems reasonable to suggest that students in high-income states, other things being equal, are willing to invest more aggressively in higher education by taking on more debt.

Indeed, when accounting for a state’s total family income, the debt picture sharpens considerably. Consider the top 10 states according to BA attainment rates for 25 to 34 year olds. In rank order, these states included Colorado, Massachusetts, Connecticut, Maryland, New Hampshire, Virginia, New Jersey, Vermont, Washington, and New York. Collectively, the BA attainment rate among adults aged 25 to 34 was 37 percent, well above the U.S. average of 29 percent.

One factor distinguished this group of states of high-achieving states above all others: a state’s median family income. Indeed, family income among these states was 122 percent of family income nationwide in 2010.

Now consider the bottom 10 states ranked by the percent of adults with BA degrees or higher. These states included Tennessee, Nevada, Indiana, Ohio, Kentucky, Missouri, Alabama, West Virginia, Mississippi and Arkansas. The BA attainment rate in these states averaged just 21 percent, well below the attainment rates nationwide. The percentage of low-income students participating in college was also below the national average.

Incredibly, just 7.2 percent of matriculating 9th graders in these states finished college in four years. Yet, debt levels were lower that the nation’s average; and, state funding among these low-achievement states, relative to personal income, was considerably greater than the high achievement states.

Indeed, the relatively strong state support for higher education in these states could not overcome their relative impoverished family wealth.  In fact, family income among these states averaged just 85 percent of family income nationwide. 

It appears then, that strong state support for higher education is insufficient to overcome a state’s relative impoverishment. Add the importance of state wealth to the cultural capital that affluent families have to pass on to the next generation, and you will inevitably find a state with good educational outcomes.

According to the evidence I’ve examined, the best thing states can do to improve educational outcomes is to improve the overall economic well-being of  its citizens, which means a healthy national economy, more and better paying jobs, and higher incomes for families. That’s the real chore, and our collective reluctance to invest in that larger enterprise can’t bode well for any nation that really wants more productive workers and better educated citizens.  

Peter Sacks

Peter Sacks

Peter Sacks is an author, economist, essayist and social critic.

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