Student debt can be a complicated formula. On the one hand, earning a degree can dramatically increase one’s lifetime earning potential — for business majors especially, the return on investment can be lucrative.
On the other hand, too much debt can hinder students’ future buying power, locking up income that could be put away for a first house or into a retirement account. And with student debt rising, estimated at more than a trillion dollars, headlines about the issue are rarely good these days.
President Joe Biden on Wednesday offered many student borrowers a bit of a lifeline. The administration announced that it will forgive up to $10,000 of student loan debt for individuals making below $125,000 per year and for families making below $250,000. Pell Grant recipients are eligible for up to $20,000 in forgiveness.
PENN WHARTON BUDGET MODEL ESTIMATES PLAN COST AT $300 BILLION
As details, and the inevitable debates, continue to roll out, the Penn Wharton Model a study on what the plan could actually cost.
According to the model, a group of University of Pennsylvania economists and data scientists who analyze various policies to predict impact on the economy, Biden’s plan will cost an estimated $468 billion to $519 billion over the 10-year budget window, depending on whether existing and new students are included.
In its report, the Wharton Model group estimated that:
- About 75% of the benefit falls to households making $88,000 or less per year.
- Loan forbearance for 2022 will cost an additional $16 billion.
- Under strict “static” assumptions about student borrowing behavior and using take-up rates within existing income-based repayment programs, the proposed new IDR program will cost an additional $70.3 billion, increasing total package costs to $605 billion.
- However, depending on future details of the actual IDR program and concomitant behavioral changes, the IDR program could add another $450 billion or more, thereby raising total costs to over $1 trillion. These details require future study.
You can see the full report, Forgiving Student Loans: Budgetary Costs And Distributional Impact, here.
STATES WITH THE MOST AND LEAST STUDENT DEBT
Meanwhile, WalletHub.com, a personal finance platform, found that individual student loan debt now averages about $37,000 per borrower, according to its 2022 States with the Most and Least Student Debt report. The report also reveals which states are friendliest to student debtors, and which are decidedly not so friendly.
At $18,344, Utah has the lowest average student debt in the country. That’s 2.2 times lower than in New Hampshire, the state with the highest average debt at $39,928. Utah also has the lowest proportion of students with debt (39%) which is 1.9 times lower than in South Dakota (73%), the state with the highest.
In terms of loans that are past due or in default, New York has the lowest share with just 3.03%. That’s 2.8 times lower than Hawaii’s 8.46%.
HOW SHOULD ROI IMPACT COLLEGE SPENDING?
So, what are prospective parents and students think about all this? How should return on investment factor into their decisions?
Some of the benefits of the college experience cannot be measured by price alone: Lifelong friends and networks as well as a deeper understanding of the world, says professor Lucia Dunn of Ohio State University.
“But on a strictly economic basis, if the major does not produce measurable value added sufficient to justify taking on the required debt, then I think a family may want to consider other options,” Dunn says. “These could include work-study possibilities, choosing a cheaper college, etc. Also, these days many lucrative and satisfying fields can be entered without a college degree, and many internet groups can provide the non-monetary benefits that I mentioned without formally registering in college.”
Continued education after high school still has very real impacts on both financial and social wellbeing later in life, but the prospect of attending traditional universities has never been more financially risky.
“The main personal and social issue of concern is the number of students who take educational loans but do not complete their degrees. Loans make sense for the majority of students IF they complete their degrees,” says Philip A. Ballinger, associate vice provost for undergraduate admissions at the University of Washington.
“The single most important factor for student success is full-time enrollment in each academic term. Policies that encourage and support full-time enrollment for students receiving student loans would have the most beneficial effects for the student and society in general.”
BEST & WORST, STATE BY STATE COMPARISON
For its report, WalletHub compared the 50 states and the District of Columbia based on 11 key measures in two separate categories:
Student-loan Indebtedness (85 points out of 100): Metrics include average student debt, proportion of students with debt, student debt as share of income, and loans that are past due or in default.
Grant & Student Work Opportunities (15 points out of 100): Metrics include unemployment rates, availability of student jobs and paid internships, and grant growth.
The chart shows how the states stack up in all categories. Note that states are ranked by order of most student debt, so it’s not actually great to be No 1 in this case. Sorry West Virginia!
Read WalletHub’s full report here.
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