Student Debt Has Gotten Counterproductive and Unequal

Third Way, a centrist think tank, is making some waves with a new report examining how student debt is impacting students’ ability to graduate from college, and what it might be doing to them after they leave school.

Rachel E. Dwyer, associate professor at Ohio State and author of the report, finds that college graduation rates correlate with higher student debt up until about $10,000. After that: the higher the student debt, the lower the likelihood of graduating.

Relevant fact: The average amount of student debt it takes to earn a bachelor’s degree is around $30,000.

The conclusion that some—including the Wall Street Journalare taking from this is that some student debt might not be such a bad thing after all. But at its core, it’s a self-fulfilling prophecy: If you are in desperate need of something, and you have no way of paying for that thing, then acquiring a loan will increase your ability to immediately pay for that thing.

The problem, which the Third Way report confirms, is that we’ve allowed the price of college and its attendant debt to rise well beyond the point where it is actually helpful in getting people through college. It’s actually pretty striking to see a negative correlation between student debt and graduation after $10,000, particularly at public colleges. In fact, you would expect that in a world of rising college prices, even high amounts of debt are correlated with higher graduation rates (after all, it makes them more likely to pay the bills)—but that the debt may be totally ruining students after college. That the correlation takes a nose dive certainly hints that requiring high levels of debt is pretty unreasonable if you want them to graduate.

It’s also not an equally shared burden. Low- and middle-income students face the strongest diminishing returns to debt—in fact, working class students with $20,000 in debt at public colleges have a less than 20% probability of graduating. This is a major problem!

This points to a broader mischaracterization of the arguments many of us have been making about the potential harm of a debt-based system of college financing. Almost no one, including those of us who support an option of debt-free public college, is arguing that in the absence of any other financing mechanism, taking out a loan isn’t helpful in paying a giant up-front college bill. Likewise, no one would argue that a high-interest payday loan is, in the immediate term, unhelpful in paying an emergency medical bill, or water bill, or a rent payment that keeps you from getting evicted. Predatory payday loans aren’t a cause, they’re a symptom—of our inability to raise wages, provide affordable healthcare or housing, or generally broaden the social safety net in a way that prevents people from needing to borrow just to get by.

Likewise, rising student debt is a symptom of the rising net price of college. Debt is the weather, not the climate.

Further, this study is only looking at people who are already in college. In other words, no one who was scared off by the high net price or prospect of debt is included in the sample. But we know that there is a large population of college-qualified students, primarily from low-income backgrounds, who do not attend college at all precisely because of the high cost. (Update: I'm certainly not the first to say this. Many, including Sara Goldrick-Rab at the University of Wisconsin, have been sounding this bell for a long time, detailing how high net prices are manifesting themselves in the form of debt, and did so again at an event Demos hosted on this issue in Washington DC on Tuesday. For a good rundown of the detrimental impacts of high net prices on access, read Goldrick-Rab's exploration of two free years of college, as well as research from the Advisory Committee on Student Financial Assistance -- Table 1-C of this report.)

Likewise, there are a couple examples that show that dropouts with debt face the highest probability of financial concerns and depression, and that graduation seems to make the biggest impact on those two things in the near term—but it should be noted that debt is “unhelpful” for both graduates and dropouts. What it doesn’t measure is whether or not student debt is causing trouble for people beyond their ability to remain financially solvent or not slip into depression. But we have plenty of evidence that student debt is changing employment or savings behavior, even for those who are not stressed out about making immediate monthly payments.

What’s happening here seems pretty obvious. We’re requiring students to take on debt just to get their foot in the door—a requirement that wasn’t close to universal until recently—and a modest amount of that debt helps them fill the gap between what college costs and what they can scrounge up in the immediate term. But frankly that’s a pretty low bar to set, particularly when we know that students have to take on way more debt than what is being deemed “positive,” and that overall graduation rates haven’t budged in decades.

Basically, just because someone has a mechanism that helps them pay a bill doesn’t mean that the underlying system is sound, or that it is in any way the right mechanism. It doesn’t mean that everyone has access, or that we shouldn’t worry about the impact of our policy choices in the long term. And it sure doesn’t mean that the burden is shared equally.