The other day I received the following excerpt from an email I received from a student in our department. I can’t get it out of my mind.
I have had to work full-time (40 hours/week) at the University Hospital for the past 7 years while I pursued my bachelor’s degree due to the fact that I come from a poor family and have no other form of support. Some days I went to class from 8 or 9am till 3 or 4pm, then walked over the hospital where I would then work till 11pm, 12pm, or sometimes even 1am, and then do it again the next day. However, I am graduating debt free since I paid my own way. And the entire experience has made me a better person for it.
Today, the news has articles discussing how Republicans in the US Senate blocked a vote on Tuesday to extend the current 3.4% interest rate on Stafford student loans. Stafford loans are advertised on their website as follows:
Stafford Loan Information: Benefits
- Low fixed interest rate – Stafford loan rates for the 2011-2012 school year are as low as 3.40%
- Increased borrowing limits – up to $20,500 per year depending on degree status and years in school
- No payments while enrolled in school
- Acceptance not based on credit
There is no mention of the costs of a Stafford loan at http://www.staffordloan.com , nor is there any mention of the benefits of a college education. Both seem germane to the decision. Today, in discussing the current congressional debate it is becoming apparent that student loan debt has surpassed both credit card debt and automobile loan debt in the United States. While the amount of student loan debt is less than certain, estimates ranging from $867 billion to $1 trillion, it is certain that default rates for student loan debt exceed those of both credit cards and automobile loans. The argument is growing louder as to whether this is the next economic “bubble” in our country, where education is increasingly funded by students borrowing against their future earnings – the benefit of a college education.
Data on the benefits of a college degree, future earnings, can be found at the website of the United States Bureau of Labor Statistics: http://www.bls.gov/emp/ep_table_107.htm . This table provides the median (50% of the sample above and 50% below) income for hundreds of occupations in the United States. When one compares the median salary from a “high school” occupation with that of a “bachelor’s degree” occupation, a benefit can be found. If one takes the difference, one has an “annuity” the holder of the degree can expect to receive over their working life.
Data on the costs of a college degree may be found at the National Center for Education Statistics, where data are presented on both public and private colleges and for both two and four-year programs. While not always discussed, the costs of college have been increasing faster than the wages of those with a college education. Thus, it takes longer for a degree to pay for the cost of earning the degree.
Let me present an example that I have specifically chosen due to the fact that the salary for a high school educated “substance abuse counselor” is not that different from a college educated “mental health and substance abuse social worker”. The former has a median salary of $31,120 and the latter a median salary of $38,600 for an education “benefit” of $7,480 per year. Of course this comes with the cost of $19,300 per year of education from a four-year public institution and four years of forgone earnings of, say, $31,120 per year. If we use the current cost of student loan borrowing of 3.4%, we find that the net present value of this college education is a negative $35,927. This amount balloons to a negative $91,388, if the cost of borrowing is increased to 6.8%. The conclusion is that the educated is worse off than the uneducated.
On the other hand, if the bachelor’s degree educated social worker pursues a career as a “medical social worker”, the median salary rises to $47,230. In this case, the net present value of the decision to attend college at 3.4% is a positive $136,804 and $1,108 if a 6.8% rate of interest is used to discount the cash flows back to the present.
What can we conclude? First, the cost of borrowing should have a huge effect on the decision of young people to attend college and work toward a degree. Greater costs can drastically reduce the number pursuing education, as well as the number deciding the realized benefit is not worth the cost and, hence, they decide to default on the loan. Second, one needs to make sure that the degree they seek actually has the monetary benefits to counteract the costs of the education and to employ their human capital appropriately. Third, if the cost of higher education were not as great, more people would receive an education in their attempt to grasp financial success. In a society endeavoring to compete in the world economy of the 21st century, such a subsidy for those who create our future, the young, appears to be just as valid as our decisions to subsidize the health care expenditures of the aged. Finally, perhaps my student is correct and taking longer, while working for your goal, does “make you a better person for it”.