White House: Higher Education Financed Through Loans A Worthy Investment
By Allie Bidwell and Brittany Hackett, Communications Staff
Despite the high cost of college, pursuing a higher education – even when it’s financed through student loans – is on average worth the investment, according to a new report from the White House’s Council of Economic Advisors. At the same time, it’s important to understand the risks and challenges that come along with student loan debt, and knowing how to avoid situations that can lead to default and other financial problems.
The report, released on Tuesday, gives a more detailed look at how a college education can benefit students in the long-run, and which factors can contribute to challenges along the way.
“Investments in education typically have high returns, and it’s essential to address the challenges of student debt, so that all Americans can gain the economic benefits of higher education, while minimizing the risks like failing to complete a degree, receiving a low-quality education, and finding a job with low earnings,” wrote Jason Furman, chairman of the Council of Economic Advisors, in a blog post.
Some of the rise in student loan debt, Furman continued, can be attributed to the growing number of individuals choosing to attend college. Over the last several years, outstanding student debt has grown to $1.3 trillion, “due in large part to rising enrollments and a larger share of students borrowing,” the report said. However, the amounts taken out continue to be low, with 59 percent of borrowers owing less than $20,000 in student loan debt. In 2015, the average undergraduate borrower owed $17,900 in debt, while graduate students continue to hold larger volumes of student loan debt.
The report also found that:
- Average outstanding balances rose roughly 25 percent to 30 percent between fiscal years (FY) 2009 and 2015 when adjusted for inflation.
- The greatest increases in student debt were seen among lower income and older, independent students who largely attended community colleges and for-profit institutions.
The report also touted large increases in income-driven-repayment (IDR) plans like President Barack Obama’s Pay As You Earn (PAYE) plan, which it said is “helping many borrowers who showed signs of distress prior to enrolling.” The report’s findings include:
- The number of federal student loan borrowers who are enrolled in IDR has increased fourfold since 2012, rising from 5 percent in the first quarter of FY 2012 to 20 percent in the same quarter of FY 2016.
- IDR borrowers tend to come from more disadvantaged backgrounds, with an average family income of $45,000, compared to an average family income of $57,000 for borrowers enrolled in a standard repayment plan.
- Over 40 percent of borrowers who entered IDR in FY 2011 have defaulted, had an economic hardship deferment, or have a single forbearance of more than 2 months in length prior to entering their first IDR.
And as the national outstanding student loan debt continues to grow, many have expressed concern about a “student loan bubble” that could have larger ramifications for the economy. But the White House report maintains that while student loan debt has caused problems for individuals, it “has not been a major factor in the macroeconomy.”
“Despite its steady rise over the past decade, aggregate student loan debt remains small relative to aggregate income,” the report said, noting that in 2015, total student loan debt was 9 percent of aggregate income. “By itself this is considerably smaller than the rise in mortgage debt prior to the crisis and it has also been accompanied by a reduction in other forms of consumer debt.”
Generally, Furman wrote, earning a college degree leads to a substantial increase in lifetime earnings that exceeds the amount students borrow to pay for their degrees, which on average was just under $30,000 in 2012 for graduating students.
Still, there are students who take out loans to pay for college who do not find a well-paying job, and struggle to repay the debt they’ve accumulated. Often times, the students who struggle most and end up in default have relatively small amounts of student loan debt, but did not earn a degree. Loans of less than $5,000 accounted for more than one-third of all defaults for the 2011 cohort, according to the report. Other students rack up high amounts of debt to pay for a lower quality education.
“The benefits of investments in college education for both individuals and our overall economy are clear, and last year, federal student loans helped 9 million Americans make investments in their futures,” Furman wrote. “Typically, this investment pays off many times over, but ensuring that this is true for all students remains a challenge and a key priority in the coming years.”
Publication Date: 7/20/2016
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