Winter 2021
February 24, 2021
Which Post-Secondary Loans Pay Off?
Is it worth it to take out loans to pay for post-secondary education?
The short answer is: it depends.
Like many major financial decisions, the “right” thing to do is as complex and varied as the individuals making them. And decision-making about student loans can be approached from various frameworks.
One such framework is about dollars and cents. Will the amount of money you can earn with your degree make the cost of the loans worth it in the long run?
Adam Looney of the Brookings Institution examines this question in his November 2020 report, Department of Education’s College Scorecard shows where student loans pay off… and where they don’t. The report uses data from the Department of Education’s College Scorecard to compare average loan amounts to average first-year earnings for borrowers in different programs of study (such as law, nursing, or business administration) and with different types of degrees (such as associate, bachelor’s, or master’s degrees).
The report makes clear how important it is to consider both how much a borrower might end up owing and how much they might end up earning as a result of their degree or certificate. For example, while borrowers with a professional degree in pharmacy owed an eye-popping average of $126,000, the average amount they earned in their first year of work was $110,728, an income high enough to cover cost of living and loan payments. On the other hand, borrowers with an undergraduate certificate in cosmetology owed an average of $9,934, but earned an average of only $16,554 in their first year of work, an amount that makes it challenging to meet even basic living expenses, let alone monthly loan payments. The cosmetology student will likely struggle a lot more to repay their debt than the pharmacy student. It also seems much more likely that the debt for the pharmacy degree will pay off well in the long run.
From his examination of the data, Looney draws three main conclusions in his report:
- After graduating, many borrowers owe modest amounts of money compared to their earnings and “thrive because of their educational investments.”
- However, some borrowers owe large amounts of money compared to their earnings and are much less likely to be successful financially.
- A third group of borrowers end up owing much more than they can typically earn in their fields.
It is important to note that the report is based on averages: average loan amounts and average earnings. It does not disaggregate—or, break down—information on loan amounts or earnings by factors such as race, ethnicity, gender, or geographic location, all of which have significant impacts on earnings.
These kinds of averages can be useful, however, in terms of providing a snapshot of the relative earnings for people with different types of degrees. For example, the data shows that people who have bachelor's degrees in nursing earn an average of $64,930 in their first year of work. This is a considerable amount more than people with bachelor's degrees in psychology, who on average earn $28,421 in their first year. So, while these averages do not mean that you should expect to earn $64,930 if you get a bachelor’s degree in nursing, they do mean that you can reasonably expect to earn considerably more with a bachelor’s degree in nursing than with one in psychology.
It is also important to remember that a dollars-and-cents approach is one of many frameworks for decision-making about student loans. Other important frameworks include personal factors such as values, goals, and responsibilities, and external factors such as the influence of family and community, culture, and economic environment. “Worth” is measured in many ways besides money, and it is measured differently by different individuals. For example, a person may have a passion for cosmetology, and enjoyment of their work may hold much greater non-monetary worth for them than a degree in nursing.
Considering borrowing through the framework of the financial payoff is one valuable tool for students in their decision making toolkit. Looney’s examination of data from the College Scorecard is a good starting point for potential borrowers in researching this aspect of their borrowing decision.
So, is it worth it to take out loans to pay for post-secondary education?
It depends.