When it comes to personal finances, everything is relative. What seems expensive to one person is cheap to another, depending on their income stream, debt, and attitudes about money; this is true when we’re talking about pocket money, but it’s even truer when the subject is student loan debt. The tendency is to talk about debt as if borrowing less is always better. This makes sense at first glance – who would want to borrow more, if they could avoid it? But as Susan Dynarski points outs at The Upshot, borrowing less money isn’t necessarily a recipe for career success – or even avoiding default.
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“It’s natural for people listening to the politicians to connect the two facts with a causal arrow: More debt leads to more default,” writes Dynarski, a professor of education, public policy, and economics at the University of Michigan. “But the reality is surprising: Borrowers who owe the most are least likely to default.”
Dynarski notes that the “biggest borrowers tend to become the biggest earners.” Unsurprisingly, graduate students borrow the most, with doctors and lawyers accruing median debt of $162,000 and $141,000, respectively. In theory, then, some grad students can handle a higher debt load, because they have the potential to earn more.
“Over the past 50 years, workers with graduate degrees have enjoyed the largest gains of any education group, with their inflation-adjusted earnings nearly doubling since 1964,” she writes.
In addition, she points out that the default rate is lower for grad students than undergrads: 7 percent, compared to 22 percent, according to the Department of Education’s estimate.
Even a Small Loan Can Mean Big Trouble, If You Can’t Repay It
So, should every student go to grad school? Obviously not. For one thing, not all graduate degrees are created equal. PayScale’s College Salary Report ranks the best graduate schools by salary potential; the bottom line is that while a law degree from Emory University School of Law or an MBA from Harvard Business School might set students on the path to professional and financial success, a graduate degree from a lower-ranked institution might not promise the same glory.
The heart of Dynarski’s argument is this: “Getting students to borrow less is not an obvious path to reducing default, since 51 percent of defaulters left college with less than $10,000 in student loans.”
Instead, in a Hamilton Project discussion paper, she and postdoctoral research fellow Daniel Kreisman suggest moving to an automatic income-based repayment program that rises and falls with income and maxes out at 25 years.
Determine the Right Educational Investment for You
Proposals like this would change the landscape of student loan debt for borrowers at most income levels, but in the meantime, prospective students need a plan that will keep them from taking on more debt than they can realistically repay. This means making some tough choices about which schools, programs, and majors to pick, but as Dynarski points out, it doesn’t necessarily mean going for the lowest price tag. A small loan payment and no income stream isn’t much better than a large payment and low income stream.
For entering students, the goal is to consider their interests, aptitudes, and career goals, and consider narrowing down their options with earning potential in mind. As this year’s College Salary Report shows, there is no one-size fits-all solution to the problem of choosing a major or a school. Sometimes, more education equals better pay, and sometimes it’s just more education. If a student wants to be a dental hygienist, for example, an associate’s degree will earn them an early-career median salary of $61,300 – not far from the $65,800 median they could expect with a bachelor’s.
The ultimate goal is not to avoid borrowing – it’s to avoid borrowing money you won’t be able to pay back.
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How much student loan debt did you accrue during your education – and was it worth it? We want to hear from you! Leave a comment or join the discussion on Twitter.