Maybe All That Student Debt Is a Good Thing

Worries about the rising amount of student-loan debt mask several positive trends

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There's a new "crisis" brewing. Students are in debt up to their eyeballs. If they default en masse, the republic will quake. (Again.) 

Or something like that. It's no secret that the recent recession and the current shortage of jobs has sent many people back to school, with a lot of them taking out loans to pay for it. A recent report by the Pew Research Center found that 19 percent of all U.S. households owe money for student debt, up from 15 percent in 2007. The average owed is $26,682, up from $23,349.

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That's a lot of money, especially for students graduating into a job market where the only jobs are brewing coffee or explaining Twitter to your 50-year-old boss. But the hand-wringing over excessive student debt might be, well, excessive. It's worth recalling that student loans are generally considered "good" debt because they buy something that's a lot more valuable than a BMW Mini or a pair of pumps: education.

The Pew report goes into considerable detail documenting what we already more or less know: Households headed by people under the age of 35 have the heaviest debt load. Student debt is a much heavier burden on poor households than on rich ones. And the amount of student debt has risen by more than the rate of inflation over the last few years.

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But there could be good news in all of that, as well, because more people are getting a college degree and fewer are relying on a high school education alone. Between 2008 and 2010 (the latest data available), the number of students enrolling in college rose by 5 percent per year, according to data from the Education Department. During the 10 years prior to that, college enrollment increased by only about 3 percent per year. There's been a similar rise in the proportion of master's and doctoral students. 

Not all of those new college students will earn a degree, but many of them will, and the nation's experience with the G.I. Bill proves that a better-educated workforce is a more prosperous one. A college degree doesn't automatically assure a middle-class lifestyle these days, but it sure helps. College-educated workers vastly outearn those without a degree, and the unemployment rate for college grads is a mere 4.1 percent, compared with 8.1 percent overall.

The rising amount of student debt masks another positive trend: Overall, debt levels have been falling. The Pew report itself notes that the total amount of household debt, on average, has fallen by nearly $5,000 since 2007. Other data from the Federal Reserve shows that while Americans have taken out more student loans, they've cut back on auto, credit-card and mortgage debt. Some of that is due to defaults, but even after defaults, Americans have been paying down debt, on the whole, not racking up more.

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Most economists think that such "deleveraging" is necessary for American consumers to get financially healthy and start spending again in a way that's sustainable. Meanwhile, it's hard to argue that the shift in debt away from consumption, toward education, is a bad thing.

It matters what kind of education college students get, and there, too, there are hopeful signs. Many of the best jobs these days require a science or engineering background, in which college students had shown declining interest --until recently. Between 1996 and 2005, the percentage of freshmen starting out with a major in science or engineering dropped from 34.2 percent to 30.9 percent. But that has now spiked to 38.4 percent. Thank you, Mark Zuckerberg.

Consulting firm McKinsey predicts that by 2020, there will be a shortage of 1.5 million college grads in the U.S. economy. Anybody struggling with student loans today may wonder if they did the right thing by taking on debt to pay for education. But a few years from now, it might seem like a no-brainer. Of all the types of debt you could take on, student loans are the most likely to pay for themselves. Many times over, in fact.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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