Most Student Debt Belongs To High-Wealth Households

Discussions of student debt too often neglect the fact that loans are intended as an investment vehicle. Students borrow money to finance an education, which is supposed to confer economic benefits. Yet in official statistics on Americans’ wealth and debt, only the liability side of the student debt equation is shown. The asset side—the education the debt financed—is usually absent.

In a new report for the Brookings Institution, economist Adam Looney improves student debt statistics to incorporate both liabilities and assets. Advocates often argue that student debt is concentrated among households with low or negative net worth (on paper). Student debt forgiveness, the argument goes, would benefit the poorest households. But as Looney notes, this is like “assessing a homeowner’s wealth by counting their mortgage balance but not the value of their home.”

Looney estimates the value of households’ education investments—the increase in lifetime income attributable to the degrees their members hold. Before adding the value of education to household balance sheets, 53% of student debt is held by households in the bottom quintile of wealth. Afterwards, the share of student debt held by the poorest fifth drops to 8%. Households above the median wealth owe the vast majority of student debt.

The reasons are intuitive. The most lucrative degrees—in medicine, dentistry, and law—tend to be the most expensive. A young doctor with $200,000 in medical school debt looks destitute on paper. But medicine is one of the best-paid professions in the country, meaning the new doctor’s lifetime income prospects may vault him into the top 1%. By contrast, someone who never attended college has no debt, and so appears wealthier than the doctor on paper. But his lifetime income could be an order of magnitude lower.

Looney’s analysis makes it clear than mass student debt forgiveness is regressive. People who look poor on paper tend to have a lot of student debt because the asset they purchased—education—is not counted properly in official statistics, while the liability is. With proper accounting, there is no case for broad loan cancellation as an economic equalizer.

But while the value of education is high on average, the returns to postsecondary education are also uneven. In a project for the Foundation for Research on Equal Opportunity, I calculated the net financial value of 30,000 bachelor’s degrees and found that 28% of them do not have an expected positive return. While a bachelor’s degree pays off on average, some students either drop out before completion or choose a low-paying major, meaning their education may not confer the economic benefits they’d hoped for.

These instances of educational investment that fails to justify its costs are the source of most student loan distress. Loan defaults, for instance, are concentrated among college dropouts. Borrowers in low-paying fields of study experience higher rates of loan delinquency. Rather than broad loan forgiveness, reforms to the federal student loan program should be pursued with this subset of cases in mind.

To that end, policymakers should assist distressed borrowers by scrapping the punitive fees associated with student loan delinquency and make it easier for borrowers to get out of default. More importantly, Congress should ensure that taxpayers stop funding educational investments with too much risk and too little payoff. New student loans should be capped and financial penalties imposed on schools where too many borrowers fail to pay back their loans. (You can find more details in my blueprint for conservative student loan relief.)

Student loans show up on household balance sheets as a liability, but they exist to finance an asset which usually fails to appear in official statistics. This paints a too-gloomy picture of the financial circumstances of student loan borrowers. But at the same time, education is a risky asset which often fails to pay off. While mass loan forgiveness is not the answer, significant changes to federal student lending are in order.