What's Really Behind the Student Debt Boom


We've been writinga lot about student loans and the value of education lately. As I wrote last week, one of my biggest peeves about this topic is that there's too much assumption and hyperbole, and too few facts. So when I found a Department of Education database of almost 4,000 U.S. colleges with tuition, average student loan balances, graduation rates, and default rates, I got excited. (What, spreadsheets don't excite you?)

Here are a few things I learned after digging through the data.

Student debt has risen precipitously over the last decade. We know that. We also know tuition prices have surged. Sure enough, rank the 4,000 colleges by tuition, and it's clear as day: Schools with the highest tuition produce students with the most debt:

That's obvious enough. But from there, it gets interesting.

You might think students with the most debt have the highest default rates. But it's the other way around. There's a negative correlation between schools that produce students with the most debt and those students' average default rates. In other words, those who borrow the most default the least:

Tuition is similar. There's no clear link between a school's tuition and how likely its students are to default on their student loans. Students from schools with the highest tuition actually default less than schools with the lowest tuition:

This is important, because the rise in student debt is dangerous to the extent that it leaves students with a burden they can't afford. But the best way to measure that burden -- default rates -- seems to have almost no correlation with the factor we most often point fingers at: Sky-high tuition.

How does any of this make sense?

There's another factor that has a screaming-in-your-face correlation with defaults: The percentage of a school's students that graduate within six years:

So, the likely reason those with the most debt have the lowest default rates is because they're more likely to have completed their degree, and hence have better employment prospects. Those with a little bit of debt default the most because they're more likely to have dropped out before graduating.

This seems blindingly obvious, but it adds a point that often goes unnoticed: People finishing college with a lot of debt aren't the problem. People dropping out of college with a little bit of debt are where the horrific numbers are found.

But what causes dropouts? Not high tuition, surprisingly. Schools with the highest tuition have the highest graduation rates, and those with the lowest tuition have the lowest graduation rates. The top quintile of schools ranked by tuition graduate twice the percentage of students as those in the lowest quintile. Anecdotally, schools like Harvard, Yale, and Princeton charge some of the highest tuition, yet consistently graduate more than 96% of their students on time. Community colleges offer some of the lowest tuition but have some of the highest dropout rates.

Several in-depth studies have looked at what causes people to drop out of college, and most end up pointing at two factors: The quality of high school preparation, and your parents' income.

If you grew up in a poverty-stricken town undergoing budget cuts with a low-quality high school system, you're less likely to finish college. "Basic academic concepts -- understanding a course syllabus, knowing how to use library and information resources, attending class regularly, doing homework -- can be elusive notions for students who had few such expectations in their prior learning experiences," writes Daniel de Vise of the Washington Post. If you grew up in a rich town with a competitive high school and attended SAT tutoring sessions after class, you begin college on a completely different path (on average).

And if you have poor parents -- particularly a poor father -- you're less likely to finish college. "By age 24, only 12 percent of students from low-income families will earn a bachelor's degree compared to 73 percent of their higher-income peers," writes a study by the Pell Institute. Coming from a low-income family reduces your odds of attending college at all, but "even low-income students who do enroll in college are less likely to persist through degree completion than their higher-income peers," it writes. "Academically, low-income students tend to be less prepared for college than their peers. They are less likely to have taken a rigorous high school curriculum, generally have lower college entrance examination scores, and are more likely to need remediation in college."

Think of it this way: There are two kinds of student loans. There are student loans, and there are former-students-who-now-have-degrees loans. Same debt, very different outcomes.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.


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