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Get Four
|  | FEBRUARY 27, 2006
By Chris Farrell Wisdom at a Very Nice PriceAuthor Tamara Draut thinks America's youth is in financial trouble, with college loans a big part of that burden. She couldn't be more wrongThe Varsity Theater in Minneapolis, once the haunt of a young Bob Dylan, hosts mostly music acts: hip-hop, punk, indie rock, and the like. But on Feb. 8, a full house gathered to discuss the economics and finances of the younger generation. The guest was Tamara Draut, author of Strapped: Why America's 20- and 30-Somethings Can't Get Ahead. I, appearing as the voice of skepticism, shared the stage. It was an enjoyable evening of give and take. Draut takes a hardline stand in her book. She argues that the younger American generation faces a life of "downscaled dreams." The traditional middle-class life is out of reach for more and more young people. Going to college, owning a home, and having a child -- or two -- is increasingly expensive. Paychecks are increasingly meager, so more and more, the younger generation is taking on onerous debt. "They will be the first generation who won't match the prosperity of their parents," Draut writes. Considering that a staple belief in American society is that each generation ends up a bit better off than the previous one, Draut's charge is remarkable. And it's also largely nonsense. For instance, she laments that recent college graduates, already burdened with student-loan obligations, have to rack up steep credit charges to furnish their apartments and buy a wardrobe for work. Hey, earlier generations also had to furnish apartments and dress professionally. The difference is they considered Goodwill and discount clothing viable options. DOLLARS AND SENSE. Don't get me wrong, Draut makes some good points. In her book, she eloquently identifies a number of serious problems in American society including inadequate health care and a fraying pension safety net. The problem is, these issues are shared by all generations (see BW Online, 1/23/06, "It's Time to Cure Health Care"). Indeed, if you want to worry about your fellow citizens, I'd spend a lot more time fretting about the earnings prospects of fiftysomethings handed pink slips during a recent downsizing or high-school dropouts struggling to find work in an economy that rewards education. The most important section of the book deals with the current economics of a college education. Draut is well aware that a college education is the ticket to the middle class. She knows we're living in an economy that increasingly values innovation and knowledge. She's right to suggest that there is a lot government and society can do to improve access to college, especially for students from low-income families (see BW Online, 02/27/06, "Campus Revolutionary"). STABLE STATS. The pendulum has swung too far away from grants and toward loans, with median student debt jumping 74% from 1997 to 2002, according to Sandy Baum, an economist at Skidmore College. However, now I must part company with Draut. I think that her lurid tale of a whole generation drowning in a "Red Sea of debt" is misleading. And I question the increasingly popular notion that all those student loans means not only that fewer people can afford to go to college, but that it is no longer a good financial deal (see BW Online, 11/14/05, "30&Broke"). For one thing, student loan defaults have declined from 22% in 1990 to 4.5% in 2005, according to a comprehensive review of the economics of college by the Federal Reserve Bank of Minneapolis. And thanks to a decline in interest rates and gains in salaries for college graduates, the percentage of monthly income going to pay off loans has stayed fairly stable. According to the National Center for Education Statistics, the median debt burden for college graduates in 1993 was 6.7% of monthly income. For graduates in 2000, the monthly payment was 6.9% of income. IT'S ONLY MONEY. Most importantly, the return on a college education still makes it a good investment -- even if one has to go into debt to get one. "A student entering college today can expect to recoup her investment within 10 years of graduation," say economists Lisa Barrow of the Federal Reserve Bank of Chicago and Cecilia Elena Rouse of Princeton University in a recent study. "It still pays to go to college -- very much so, at least as much as ever before," they conclude. Here's how they arrived at that conclusion (greatly simplified). The answer to the question of whether a college education still pays depends on the earnings of college graduates relative to high school graduates and the costs of attending college. The economists figured that the cost of college (including tuition, fees, and lost earnings) for the average full-time student matriculating in the fall of 2003 and finishing a bachelor's degree in four years comes to $107,277. Next, they take into account recent wage trends, most notably that the earnings premium between college graduates and high school graduates has narrowed. The present value of a college education in earnings compared to a high school diploma peer is $402,959. Taken together, the net present value of a college degree to an average student entering college in 2003 is almost $300,000. Now that's what I call a return on investment. TRIPLE BLESSING. Better yet, the college job market may be perking up after five years of stagnating wages. At least that's the suggestion of a new survey by the National Association of Colleges & Employers. Companies say they plan to hire 14.5% more new college grads in 2005-06 than they did in 2004-05. Plus, starting salaries are also on the rise. For instance, economics and finance graduates are getting average offers of $45,191, an increase of 11% from the previous class. Even liberal arts majors as a group are seeing a 6.1% gain, to $30,828. Put it this way: When it comes to deciding whether to borrow and go to college or not borrow and not go to college, the choice is really quite simple: Take out student loans and get a college diploma. It's an investment that pays off over a lifetime -- financially, socially, and intellectually.  Farrell is contributing economics editor for BusinessWeek. You can also hear him on American Public Media's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program, Marketplace. Follow his Sound Money column, only on BusinessWeek Online Edited by Patricia O'Connell Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. 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