Posted by: Josh Lehner | March 14, 2013

Education and Student Debt

Following up on yesterday’s post on debt more generally, the following dives into student loan debt specifically. This is the only type of household debt that continued to grow throughout the Great Recession and now makes up the 2nd highest level of household debt behind only mortgages. If you have read our latest quarterly forecast publication, then you have already seen the following as this is excerpted and edited based on that. I would like to given a big tip of the hat to the Wells Fargo Economics Group for their recent report on student loan debt which served as a primer for this work. Their group provides very valuable commentary and information on economic issues and subscription is free, if you are interested. As for this post, I have also included a set of slides in PDF: StudentLoanDebt.

One subject that has generated concern in recent years is the high level of student debt that individuals are incurring today. Not only are students taking on larger debt burdens as the cost of school continues to increase at a much faster rate than overall inflation, but the number of students nationwide and in Oregon is very large, in part due to the lack of current job opportunities. The amount of student debt outstanding is approximately $1 trillion and accounts for 8.5 percent of all consumer debt in the U.S. (mortgages, autos, credit cards, etc). According to the College Board, 57 percent of bachelor degree recipients at public schools in the 2010-11 school year borrowed money to pay for school and those who borrowed graduated with an average of $23,800 in debt. These figures are up from a decade ago when 52% of graduates borrowed, with an average of $20,100 inflation adjusted dollars in the 2000-01 school year. In terms of enrollment, students on OUS campuses increased 22 percent from 2007 to 2011 and enrollment at Oregon’s community colleges increased even further, nearly 37 percent, over the same period. These gains reflect a general upward trend in enrollment, which spikes higher during tough economic times as job opportunities are fewer and further between.


With so much debt being incurred, the question some ask is why do individuals choose this path? The simple answer is, to paraphrase a recent conversation by the Governor’s Council of Economic Advisors, the only thing worse than taking on student loan debt is choosing not to go to college. The economic benefits of higher education can be seen below as the unemployment rate decreases for individuals with more schooling and earnings are also higher. This, in short, is why so many individuals incur student loan debt: to improve their economic situation.


There are a number of potential problems along this path, however. One, a student may not graduate, leaving him or her with few new skills to market and a much higher debt burden. Second, even with a degree, employment opportunities can be hard to come by. In fact, the unemployment rate for recent college graduates (bachelor’s or higher) has essentially mirrored that of the overall population in recent decades. While it is certainly true that college educated individuals have a lower overall unemployment rate, it takes time for new graduates to find work. Third, not all degrees or training a student obtains in post-secondary schooling are created equal in terms of job opportunities and potential wages earned in the future. Incorporating potential future earnings into a cost-benefit type analysis of incurring student debt may be beneficial for some students.

To the degree that there may be a potential asset bubble of bad student loan debt, as some have argued, it is likely to be found in the three areas mentioned above. All of these lead to a situation where the degree and/or training program(s) one attends does not lead to an economically better situation, or at least not good enough to reasonably finance the debt incurred. The theoretical reason educated individuals earn more money is that they have better skills and are more productive workers. In economic speak, students increase their human capital through schooling to raise their marginal productivity in the workplace (or equivalently signal their productivity to employers by succeeding at school), which in turn yields higher income and provides a return on the initial investment. To the extent that this is true, which the unemployment rate and earnings data suggest, the benefits outweigh the costs for higher education.

In addition to the individual returns to education, educational attainment also brings with it significant societal benefits for communities. As a result, a strong economic case can be made that public investment in education can enhance efficiency by better aligning private incentives with those of society. That said, if market incentives are altered incorrectly, the potential for inefficiencies such as asset bubbles arise. Poorly targeted or oversized educational subsidies could lead to bad educational choices.


The bottom panel above shows the default rate for Oregon students who have federal student loans that came due in 2010. These rates are our office’s calculations with categories based on the underlying data from the U.S. Department of Education, Federal Financial Aid office. While the exact breakdown by type of loan is unavailable, Stafford and Plus loans comprise the bulk of the sample. Overall, the pattern is generally what one would probably expect, with exceptions at both the top and bottom ends of the spectrum. Students from 4 year universities (both public and private) on average have a lower default rate, just as they have a lower unemployment rate and higher earning potential. Next are the majority of career schools, which generally offer training programs and/or associate degrees. Examples of Oregon schools in this category are Everest College, Sumner College, Warner Pacific College, etc. Schools with above-average default rates include culinary, art, and natural medicine institutions. Cosmetology, hair and beauty schools have an even slightly higher default rate. The pattern of default for these four major categories of schools is most likely the combination of degrees obtained and future earning potential.

Finally, both religious schools and community colleges may be somewhat of a surprise. Religious schools (bible colleges, seminaries, etc) have the lowest default rate of any category although the reason is not entirely clear. Some types of financial aid do have restrictions on the majors a student may choose, in particular some religion-related majors are excluded, so the lower default rate may be a reflection that a higher percentage of these school’s students do not qualify for federal aid. Or the fact that students from these schools simply have a lower default rate which implies that their job placement – at least their financial situation – is better than most other types of higher education institutions.

On the opposite end of the spectrum are Oregon’s community colleges. These schools have the highest default rate out of any of the categories. This is problematic since traditional four year colleges are not a good fit for many students. As a result, no significant increase in educational attainment can be achieved without a large role being played by community colleges and professional programs. State and local governments have invested significant resources into these community colleges and workforce training programs are run through them in many locations with the hope that these actions result in a stronger workforce and better jobs.

Returns on education are a function of more than just the quality of the program and ability of students. The availability of job opportunities is also a factor. This factor is clearly evident in 2010 default rates which are elevated relative to rates seen in better economic times. Differences in regional job opportunities may also help to explain the elevated default rates among Oregon’s community colleges, many of which are located in rural regions that are struggling economically.  These colleges generally enroll students from their local communities and are more closely tied to regional economies than are large, four year institutions. Regions around the state outside of the Portland metropolitan statistical area have not shared equally in the economic expansion so far. While these regions have stopped losing jobs, they have yet to begin adding jobs on a consistent basis, making loan repayment more challenging. The scatter plot below shows Oregon community college’s default rate on the horizontal axis and the primary county’s unemployment rate (or counties) on the vertical axis.


There is a positive correlation between these data series, indicating that the higher the local unemployment rate, the higher the default rate on student loans. Every county in the sample with an above-average unemployment rate is home to a college that exhibits an above-average student loan default rate.  To the extent that default rates reflect underlying, local economic conditions and not something fundamentally different, is encouraging. As local economies around the state improve, so too should student loan repayments. However, it also speaks to the need to attract firms that hire skilled workers alongside any efforts to improve the skill set of the local workforce.

Overall, going to school generally improves the lifetime earnings and wellbeing of students. Given this, the increase in student debt should be manageable moving forward, provided the economy continues to improve and provides sufficient job opportunities for all individuals to find work at reasonable wages. Should growth not pick up and provide more jobs, or the economy experiences another recession in the near term, the U.S. and Oregon are in for a rough time and bad student debt will become a larger financial issue.

Finally, the last item takes a quick look at regional educational attainment in Oregon. Oregon as a whole has a small advantage over the US in terms of bachelor’s degree recipients and even though Portland is considerably higher than the state average (and the U.S. average), relative to other major cities, Portland is just a bit higher as well.


Again, sides here in PDF if you are interested: StudentLoanDebt.


  1. Josh:

    Another possible explanation for the low default rate at religious schools is that students at those schools may feel strongly against defaulting on their loans because of ethical and/or religious beliefs.

    Many Christians have a strong aversion to bankruptcy in all except the most extreme circumstances, choosing to make heavy sacrifices in order to meet their responsibilities and pay back all debt.

    I think this attitude may be reflected in this instance as well.

    Thanks for all the work you put into a great blog resource from which many of us benefit.

    Herb Holloway

    • Thanks Herb. Appreciate the feedback and kind words. I agree with you on this point, based on experience and anecdotal information. However for arguments like this I prefer to have a survey or article to base it on 🙂 which is one reason why I left out an explanation like this.

  2. Josh,

    This is a very relevant topic given the large changes taking place regarding student debt over the past 10 years. It’s amazing to see that total U.S. student debt has risen by a factor of four since 2003; rising to about $1 trillion.

    So, thank you for your review of this important topic, and all of the Oregon-specific data.

    One thing that makes student debt more onerous than other types of debt such as home mortgage and credit card is that student debt is treated differently in the event of a bankruptcy. It is my understanding that student debt can’t be eliminated via bankruptcy.

    Also, keep in mind that correlation does not necessarily mean causation. Maybe those who attended college would have done just as well financially if they would have skipped getting a degree, like Bill Gates III and Steve Jobs.

    David Cooke

    • Thanks David. Agree on your points. While not an attorney, it too is my understanding that student loan debt can not be discharged in bankruptcy and will remain with an individual. The correlation-causation, or actually learning skills in college vs using it just as a signaling mechanism, is a hot debate and there are good arguments for both sides. It likely is a combination of the two and is unlikely to be black and white, with obvious differences on a case by case basis. See your examples for, well, examples.

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  5. […] some trends and outcomes in higher education — it’s been more than three years since our report on education and student debt in Oregon — I wanted to share some more life cycle work I’ve been doing. This compares trends […]

  6. […] been more than three years since our office released an Oregon look at student loans, defaults and the economy. We are working on updating parts of the report, more in the near future. However the big education […]

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