For most people, taking on debt to pay for college or graduate school is a good long-term investment. College graduates on average earn 61% more than those with just a high school diploma over the course of a 40-year career, according to a 2007 analysis of census data by the College Board. In 2007 the average annual salary for a worker with a bachelor's degree was $57,000, compared to $31,000 for a high school grad.
But in the short term, it's hard for many younger workers to see the payoff as they struggle to make loan payments and gain a foothold in a difficult job market. Consider this: The average college graduate who borrows the full cost of tuition and fees at a public university will be 33 before accumulated net earnings catch up to counterparts who enter the workforce directly from high school—after factoring in tuition costs, interest, and earnings foregone during the years in school—according to the College Board study. Those who borrow more to attend a private college or graduate school take even longer to match high school grads in net earnings.
As tuition rises faster than inflation and wages, some suggest that the U.S. needs to rethink the way people pay for higher education. "Young people are entering adulthood, entering the workforce, with this huge burden on their shoulders, and as a society we need to ask, 'Is this really how we should be educating people?'" says Edie Irons, a spokeswoman for the Project on Student Debt. "When young people are starting out in the hole, how are they going to afford to buy a house or go to grad school or start a business or start a family?"
Average Borrower: More Than $20,000
Some colleges are replacing loans with grants precisely because of those concerns. For example, Middlebury College in Vermont committed three years ago to giving need-based aid packages with loans capped between $1,000 and $3,000, along with small family and work-study contributions. Middlebury bases aid decisions on an estimated cost of $50,400 annually for tuition, room, and board. Grants from the school make up the difference. Middlebury hopes that sending students into the workforce with lighter debt loads will discourage them from choosing careers based strictly on salary and give students who want to work in nonprofits or the public service sector some financial breathing space to do so. "We want the student to make the decision, based on what they truly want to do and what they went to school for," says Kim Downs, Middlebury's student aid director. Some schools, including several Ivy League institutions, have replaced loan aid entirely with grants.
Still, the average student borrower graduates with more than $20,000 in debt, according to the Project on Student Debt. "It's just so frustrating," says Susan D. Strayer, director of talent acquisition for Ritz-Carlton in Washington. "They tell you to be self-made. They tell you get yourself a good education and you can get yourself into a pretty big hole." Strayer, 33, has $90,000 in student loan debt from her bachelor's at Virginia Tech and a master's from George Washington University. She also has an MBA from Vanderbilt University, which she earned on a full scholarship—but skipped two years of earnings to acquire. Strayer says her monthly loan payments of $600 barely budge the principal on her debt. She doesn't regret her educational decisions, although she says the debt load has made her put off plans to pursue a consulting side business full-time.
For certain borrowers, some relief is on the way. Two federal programs taking effect this year will cap payments at a percentage of income and forgive loans after a decade for students who enter public service. (The borrower must have federal—rather than private—student loans.) Such programs notwithstanding, Irons says students are becoming more cost-conscious about college. They need to realistically evaluate how much debt they will take on, what their monthly payments will be, and how much they can honestly expect to earn after graduating, Irons says.
Tough Choices for Grads: Starbucks?
More recent debt-ridden grads face even grimmer prospects right now because entering the job market during a recession can depress their earnings for years. Students who graduated in 1982, at the depth of the early '80s recession, earned less than their counterparts who graduated four years later, even when both cohorts were 15 or 20 years into their careers, according to research by Lisa Kahn, a labor economist at the Yale School of Management. The disparity can be as much as $100,000 in income over that period. Kahn says people who enter the job market in a recession are more likely to take lower-level jobs or positions other than what they eventually plan to do. As a result, they develop gaps in skills and experience, compared to workers who graduate into more competitive labor markets and land their desired positions earlier.
"This generation was sold the bill of goods that there will always be boom times, you will always have your choice of jobs, and salaries only go up," says Lindsey Pollak, a Gen Y career coach and author. In today's new economic reality, many graduates are making tough choices, such as moving back home with their parents or working at Starbucks (SBUX) to meet loan payments. Take Patricia Hudak. Now 24, Hudak got her bachelor's in marketing and management from New York University's Stern School of Business in 2006, graduating with $160,000 in private student loan debt. In interviews for entry-level marketing jobs, when recruiters asked what kind of salary she was looking for, she would suggest $50,000 or $60,000 a year—the minimum she figured she'd need to make her $2,000 monthly payments. "They sort of just looked at me like I had two heads," Hudak says.
Hudak moved into her parents' home in Jersey City and has been doing freelance work while trying to start her own business, Real World 101, which will sell to colleges and individuals guidebooks and other products designed for new grads. Her middle-class parents, who themselves did not attend college, pay her student loans, although Hudak plans to pay them back. "It's easy for me to say, 'Oh, I have all this student loan debt,' but I chose to take it and I have to deal with the consequences of that choice," Hudak says. "So many people in my generation think of everything as a short-term investment with immediate return."
Tozzi covers small business for BusinessWeek.com.