Should College Students Avoid Debt?

Many college students are fearful of going too deeply into debt to pay for tuition, books, and room and board. Even so, they wish to graduate “on time,” i.e., in four years. Typically, they borrow for some of these expenses and work part-time to cover the balance.

Choosing the right combination of debt and work, as well as the number and rigor of their courses, is made more complex by the fact that a college education is an asset which will generate returns over a  lifetime. Primarily, it is an investment of time. To maximize the value of the education, students must find the time to earn good grades in a major that provides both personal satisfaction and financial potential. Unfortunately, the drive to graduate “on time” has led many students to work as much as thirty or more hours per week while enrolled in a “full load” of courses. This amount of time spent earning money can defeat the purpose, sapping the energy needed to meet the rigorous demands of modern study.

Advances in technology have revolutionized course requirements and expectations, requiring students to devote more time to their studies to earn high grades. Virtually all college majors require students to combine their main interest with computer skills, statistical inference, and superior writing skills. For example, STEM fields (science, technology, engineering and math) rely more heavily on advanced math and computer programming skills, as do business and economics. As college courses become more sophisticated, they require more time.

High School Preparation, State Support, and Borrowing

One of the best ways to  save time and money in college is preparation; learning how to learn during high school. In particular, students should take elective courses that require expository writing and math word problems. Too often these courses are avoided because of the time requirement, but they are time well spent: math word problems and essay writing are practiced arts that will enable deeper study and organization of thought as required in any college major. Gaining these skills in high school will save time in completing college assignments and earning the excellent grades.

Some hold out hope that the recent proposals for “free-college” will come to their rescue, or at least that taxpayer support will rise again to the 80% level of  decades ago. Unlikely: taxpayers are now strapped with other costs, including the prison system, public pensions and health insurance, the cost of past neglect of our road system, and K-12 education.

That leaves borrowing. It is not uncommon for students to graduate with a student loan debt of  $30,000 or $40,000. The wisdom of this debt depends on what it buys. If it “buys time” and that time is used to invest in the educational asset, it could be the best investment the students will ever make in their talents, the most important asset they will ever have. That level of indebtedness is small in comparison to the enhanced lifetime earning power of those with college degrees versus those with only a high school diploma, often a difference surpassing a million dollars!

Borrowing can buy time in another way: graduation in fewer semesters and entry into a career path sooner. In short, borrowing can enable the student to earn higher grades, in more rigorous courses, graduate and enter the job path sooner, all contributing to enhanced lifetime income and the ability to repay their loans. If invested wisely, the student debt is not a burden; it enables a huge benefit.

Reducing the Loan Repayment Burden

The difficulty is in the repayment formula that demands high monthly payments soon after graduation. To reduce this burden, repayment formulas should provide for lower monthly payments over a much longer term, say 30 or 40 years, much like a home mortgage. Moreover, the monthly payment amounts should be graduated rather than constant. The monthly payment amount should follow the usual pattern of a person’s earnings: low for recent graduates and increasing to peak levels around middle age. For example, with a fixed cap of 5% of annual income, the amount of the repayment would be low at first, then increase as income rises. Finally, the interest rate should not be locked in; the graduate should be able to refinance the loan to take advantage of lower interest rates.

William Holahan is Emeritus Professor and former Chair of the Department of Economics at the University of Wisconsin-Milwaukee. Charles Kroncke served as Professor of Finance at UW-Madison and Business Dean at Auburn, UW-Milwaukee, and UT-Dallas. They are co-authors of “Economics for Voters.”