Are Student Loans Worth It?
President Biden’s decision to forgive student debt for many millions of Americans—and the legal battle that is likely to follow—have ignited a national conversation around the structure, ethics, and hidden costs of student debt in the United States. We asked SOM’s Paul Goldsmith-Pinkham, whose current work focuses on assessing the costs and benefits of debtor protection policies and understanding the role that consumer debt plays in the macroeconomy, to put the administration’s move in context.
Graduates at California State University of Los Angeles's 2022 commencement ceremony in May 2022.
On balance, is taking on student debt a positive or a negative for most people?
Student debt itself isn’t inherently a good thing, but the college or graduate school wage premium is well-documented. To quote the economist David Autor: “…[T]he inevitable sticker shock that households feel when confronting the cost of college should not obscure the fact that the real lifetime earnings premium to college education has likely never been higher.” (See Figure 4 in Autor (2014) and Figure 5 in Avery and Turner (2012).)
The unemployment rate differences across education categories is also stark: In 2021, the unemployment rate for those with a high school diploma was 6.2%; with a college degree, it was 3.5% percent; for a professional degree, it was 1.8%.
“If the question is ‘Is it worth taking student debt to go to college and finish a degree vs. not going to college,’ the answer is, for the vast majority of people, it is worth doing it.”
It’s important to note that it’s hard to know exactly how causal these estimates are—how much of the college effect is selection vs. a true effect from college. Yale SOM’s Seth Zimmerman has worked on this and shown that the benefits of attending seem to outweigh the costs.
As a result, if the question is “Is it worth taking student debt to go to college and finish a degree vs. not going to college,” the answer is, for the vast majority of people, it is worth doing it.
How has the impact of student debt been different for people in their 20s and 30s than previous generations?
There is just far more student debt now than any other time period. Christopher Avery and Sarah Turner highlight this. In 2010, new borrowing for education was five times what it was in the 1980s.
How does student debt worsen the racial wealth gap? Could forgiving this much debt make a difference?
This is hard to know. Black Americans have higher average student loan balances than White Americans, and so debt forgiveness will benefit those borrowers but there is substantially lower college completion among Black Americans than White Americans. A question is what wealth gap to focus on—conditional on taking on student debt, Black borrowers have significantly more challenges paying down their debts than White borrowers. Overall, however, it’s not clear whether the overall wealth gap would shrink.