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How Much Student Loan Debt Is Too Much?

While a college education is no guarantee of a job post-graduation, not getting a degree is strongly correlated with lower earnings and higher unemployment. High school seniors are stuck in a Catch-22: they must get post-secondary education in order to position themselves for success in the job market, but in doing so, they often saddle themselves with debt they can't afford.

"... [T]here is a sharp divide in employment rates and earnings for American workers by education level," write Michael Greenstone and Adam Looney at The Brookings Institution. "In April 2013, the unemployment rate for individuals twenty-five and older without a high school diploma was over 11 percent, but below four percent for those with a college degree. Indeed, because of the vast differences in job opportunities between high school graduates and college graduates, the rate of return to college exceeds 15 percent -- far higher than comparable returns on other assets."

Between 2000 and 2011, the number of first-time, full-time college students who received student loans increased 11 percent, according to the National Center for Education Statistics. For the academic year 2011-12, 51 percent of first-time students who attended college full-time had loans. An increase occurred at all types of institutions, public and private, four-year and two-year.

In addition, the average size of these loans increased, from $5,000 annually to $6,800, a 36 percent increase.

Why Has Student Loan Debt Increased?

In the simplest terms, students are forced to take on more debt because tuition has gone up while income has stagnated. The NCES reports that tuition and fees for full-time students at all institutions averaged $10,300 in 2011-2012 -- a 46 percent increase from 2000-2001's average of $7,100. (All numbers are rendered in 2012-2013 dollars.)

Meanwhile, income over the same period has faltered, especially when measured in real terms. The PayScale Index, which measures the change in wages of employed US workers, shows an increase of 7.5 percent since 2006 -- but The Real Wage Index, which incorporates the Consumer Price Index, shows that the buying power of those wages has fallen 7.5 percent, once inflation is taken into account.

Funding like Pell Grants can't make up the shortfall. The American Association of State Colleges and Universities reports that the maximum Pell Grant for the 2009-2010 year covered only 36 percent of the cost of attending a four-year public college or university. Compare that to 1976, when the precursor to the Pell Grant program covered 72 percent of the costs. Furthermore, there are thousands of students whose families don’t qualify for Pell Grants, but don’t earn enough money to pay the sticker price of most private, and many public, universities.

Who Is Most Likely to Default?

According the NCES, about 4.7 million student loan recipients entered the repayment phase between October 1, 2010, and September 30, 2011. Ten percent defaulted before the end of 2012, meaning that they had not made a payment on their Direct Loan or Federal Family Education Loan for 270 days.
The default rate was highest at public two-year schools, at 15 percent, and lowest at private nonprofit schools, at 5.1 percent. The largest increase in defaults between 2009 and 2012 was also at public two-year schools (11.9 percent to 15 percent). During the same time period, the default rate actually improved at private, for-profit, four-year schools -- 15.4 percent to 13.4 percent.

Students with the smaller loan amounts are more likely to default on their debt than students with higher ones.

"One likely explanation, offered by the New York Fed researchers, is that many Americans with small loan balances are dropouts," writes Josh Mitchell at The Wall Street Journal. "They may have attended school for a semester or two without getting a degree. They often don't end up with the decent-paying job that a college education is supposed to bring, and thus lack the income to repay their debt."

Why Evaluate College ROI?

PayScale calculates return on investment for a college degree by comparing the costs incurred for a specific degree against the gain in median pay, compared to a high school graduate. Costs obviously vary widely not only by school and program, but also by in-state and out-of-state status, financial aid, and time to graduation.

Individual mileage will vary, based on factors ranging from academic performance, internships and networking opportunities during college, and the economic environment students enter after graduation. But by looking at the return on investment various degree programs and schools offer, students can maximize their chances of choosing a career path that will pay them back financially and a student debt load that they will be able to pay back based on their intended career path. In other words, they can make choices that ensure the debt they accrue isn't more than they can manage.

This doesn't necessarily mean avoiding debt altogether. PayScale's ROI rankings show plenty of schools and programs with high average loan amounts and high ROI. It does, however, mean that prospective students should educate themselves on how much debt they're likely to take on -- and what the payoff will be.

What do the highest ROI programs and schools all have in common? One word: STEM. Science, technology, engineering, and math degrees -- and the schools who offer them -- are consistently at the top of the list for ROI, interspersed with business degrees from a few select programs.

When Should Students Take on Debt?

Engineering schools see the highest median ROIs and art and design schools tend to graduate alumni with lower salary potential and higher debt. This doesn't mean, however, that every entering student should learn to love STEM. In the data visualization above, there are plenty of liberal arts schools that have high ROIs and low student debt loads. School choice should be based on your individual goals and financial circumstances.

"If you decide to study a subject merely because you have been hearing about how employable you will be when you graduate and how much money you can make, you are setting yourself up for disaster," says Dawn Rosenberg McKay of's Career Planning. "If you study a subject that doesn't really interest you, you won't enjoy your classes. You won't do well in them and you will be very likely to discontinue your studies. Then all you will be left with are a hefty college loan without the means to pay it off."

Perhaps even worse, McKay says, is the possibility that you'll graduate, only to be shackled by debt to career you can't stand.

"You are much better off choosing a major that you will enjoy while still making sure you have skills that will contribute to your employability when you get out," she says. For example, English majors who take some basic coding classes can open up new areas of opportunity and forge a successful career in tech, but still immerse themselves in a subject they love in college.

In other words, the best college choices can't be made in a vacuum, even with the necessary data to back them up. The right school for you is the one that offers you the best chance to prepare for a career you love and can succeed in -- without the burden of debt you can't afford to pay back.
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