WSJ: Congratulations to Class of 2014, Most Indebted Ever

Congratulations to Class of 2014, Most Indebted Ever

• Phil Izzo

As college graduates in the Class of 2014 prepare to shift their tassels and accept their diplomas, they leave school with one discouraging distinction: They’re the most indebted class ever.
The average Class of 2014 graduate with student-loan debt has to pay back some $33,000, according to an analysis of government data by Mark Kantrowitz, publisher at Edvisors, a group of web sites about planning and paying for college. Even after adjusting for inflation that’s nearly double the amount borrowers had to pay back 20 years ago.

Meanwhile, a greater share of students is taking on debt to finance higher education. A little over 70% of this year’s bachelor’s degree recipients are leaving school with student loans, up from less than half of graduates in the Class of 1994.

The good news for the Class of 2014 is that they likely won’t hold the title of “Most Indebted Ever” very long. Just as they took it over from the Class of 2013, the Class of 2015 will probably take it from them.
But as the debt burden of college graduates continues to rise faster than inflation, it begins to complicate the question of whether a bachelor’s degree is worth the expense. So far, that answer is a firm “yes.” College graduates have a lower unemployment rate and make more money than their contemporaries without a degree. Of course, some majors pay more than others, but in just about every industry workers with college diplomas are paid more than their counterparts without one. And the more education a person has, the greater the pay advantage becomes. (Although, that also often means more loans. “About 15% of graduate and professional school students graduate with six‐figure student loan debt, compared with only 0.3% of undergraduate students,” Mr. Kantrowitz says.)

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But will the debt associated with a college degree always be worth it? That’s a little less clear. “A good rule of thumb is that undergraduate and graduate students should borrow no more for their entire education than their expected salary at graduation,” Mr. Kantrowitz says. For the average borrower, that’s still a pretty good bet right now. Granted, not everyone has the same debt, and not everyone gets a job at graduation. But if we compare student debt for young college graduates and salaries for young people with degrees, we can get a sense of where we stand.
In 2012, the most recent year for which data are available, workers with just a bachelor’s degree were making a median salary of $46,900 a year while the average student loan balance for people under 30 years old was $21,400. Those numbers aren’t directly comparable, but it does seem that most young people can pay back their debts.
The problem developing is that earnings and debt aren’t moving in the same direction. From 2005 to 2012, average student loan debt has jumped 35%, adjusting for inflation, while the median salary has actually dropped by 2.2%. If that continues debt burdens could start to become more unwieldy.

There is already evidence of this in the housing market. A report this week from the New York Fed looked at how student debt is affecting entry into the housing market. Researchers Meta Brown, Sydnee Caldwell, and Sarah Sutherland found that a smaller proportion of people at age 30 have mortgages that at any time in a decade. But for the first time starting in 2012, having student loans made it less likely that a 30-year-old would have a mortgage.

Now, 30 still is pretty young and perhaps the student debt is just causing workers to put off home purchases for a little while. Separate research from Richard Fry at the Pew Research Center, looked at the debt burdens and net worth of those with and without student debt. Those data showed that for people under 40, the same proportion of college graduates with and without student debt also had mortgage debt. But those data are a little older — they were collected in 2010 — and they include people with much lower student debt burdens. And they also show that people under 40 with student loans had more other debt — credit cards and auto loans — and a lower net worth than their peers without student debt. As student debt gets heavier, it’s also likely to increase those other burdens, and make it harder to afford a house.
Housing, an important driver of overall economic growth, has bounced back from the lows following the recent recession. Mortgage debt increased in 2013, according to separate research from the New York Fed, which is good news for the overall economy. But all of the growth came from people under 40 years old. If student debt is putting a ceiling on that growth, it’s bad news for the broader economy.