A Steep Climb for Indebted College Grads

Graduates with student loan debt work many years before their net earnings equal those of workers without a degree, according to a College Board study

By John Tozzi

The idea for "A Steep Climb for Indebted College Grads" came from BusinessWeek reader Susan Strayer, director of talent acquisition for The Ritz-Carlton Co., in Washington, D.C.

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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.

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