Preston Cooper writes for the Martin Center about when college student debt makes sense and when it’s a bad idea.
Student debt has a bad reputation. It’s under attack from the left, which sees debt as a ball and chain that ruins the lives of young people who had the audacity to seek a decent education. Many on the right share this dim view of student debt but lay the blame at the feet of a higher-education bubble that cannot get its costs under control.
There’s merit to both of these views. Student debt can sometimes ruin lives, and the federal student loan program has indeed driven bloat and a proliferation of useless degrees. But the truth is more complicated.
While it can cause problems when employed in the wrong way, student debt can also be beneficial when used responsibly. The question is not whether we should eliminate student debt, but how we can ensure it is used only for beneficial purposes.
If the education is worth it—a big if, as we shall see—it will yield an earnings payoff in the future. Debt can help students with a liquidity issue, but it can also harm their career prospects if they take on bad debt.
When is student debt a good thing? “Good” student debt finances credentials that provide adequate value relative to their cost, increase lifetime earnings, and supply students with skills that are useful in the labor market and in life. “Bad” student debt deviates from this ideal in one or more respects. In discussing the “bad” sort of debt, many critics of higher education’s loan dependency have a point. But too often, the condemnation of “bad” debt fails to come with an acknowledgment of “good” debt. …
… There are three principal categories of “bad” student debt:
Debt taken on by college dropouts,
Debt associated with low-value degrees, and
Debt that fuels credential inflation