Even in Denmark, Students Live in Poverty

When tracking poverty rates over time, one notable trend in the last 40 years or so is the rise in poverty for ages 18-25.

One of the major causes of this is the rise of mass higher education. Previously, the vast majority of people ages 18-25 were in the labor force and had at least somewhat decent earnings. Now many are in school and have very little income as a result.

In the US, students receive no benefit income except any refund they may receive from the Pell Grant after it's been applied to their tuition. They live on loans, parental transfers, or earnings from side jobs. In the Nordic countries, it's somewhat better. Typically, tuition is zero and students receive a fairly modest monthly living grant. The grant is not enough to cover all their living expenses so students typically take out loans to make up the rest.

Loans are not counted as income for poverty purposes. So, when countries increase the share of their young people who are in college, they increase the share of young people whose consumption is mostly financed by loans, and thereby increase the share of young people who show up poor.

This dynamic can lead to overall poverty figures that are, at least in some sense, a bit misleading. Denmark is a prime example of this. In 2012, Denmark's poverty rate was the lowest in the OECD at 5.4%. But here is what the poverty rate in Denmark looks like for various age groups.

The poverty rate for the 18-25 age group is sky high. Indeed 41% of all people counted as poor in Denmark in 2012 were in this 18-25 age group, many of whom were merely students living on modest grants and loans. If you take the 18-25 population out of the calculation, Denmark's poverty rate falls from 5.4% to 3.5%.

In the US, things look a bit different. The 18-25 age group has approximately the same poverty rate as the 0-17 age group. If you ignore the 18-25 age group, the overall poverty rate only falls from 17.9% to 17.5%.

I bring this up both because the student distortion (if you will) is worth knowing about and also to point out that, in a certain sense, the lowest in the world Nordic poverty rates (especially Denmark and Norway) are actually somewhat overstated. There is little doubt that these countries could knock down their overall poverty rate quite a bit further by simply changing the precise structure of their student benefits (e.g. through higher grants and income-based graduate taxes). But they just choose not to because they apparently would rather use publicly-sponsored loans for that purpose. As a result of this choice, many of their very large number of students wind up income poor. This significantly inflates national poverty rates, but the poor students are, for the most part, basically doing fine.