The college education is an exploration of the amazing achievements of the human race as well as enabling students to discover their own talent and passion within a galaxy of opportunity.  It is an expensive endeavor; borrowing from the student loan program is an essential part of the strategy to maximize the value of the educational asset.   This is the first of two essays on student loans for the Grassroots North Shore.  It focuses on ways to make high-valued use of student borrowing.    The second essay will present a two-part plan to improve the market for student loans to reduce the burden of repayment. 

         A college education is a costly service and must be paid for somehow.  Students do not pay full cost; in addition to the student share of cost, the remainder is split between state and federal support of higher education,  as well as fund-raising and yield on endowment.   While the total cost of an education has gone up at about the rate of inflation, the state share of the cost has gone down, requiring the share of cost paid by the students to rise faster than inflation.

         45.5 million college students and graduates have built up $1.75 trillion in student loan debt.   It is not uncommon for individual graduates to have ten or twenty thousand dollars of indebtedness,  in some cases much more. Hefty monthly payment obligations begin soon after graduation.  Proposals to ease this burden include making tuition "free" and canceling some or all of the debt already accumulated. 

          Free tuition and student loan cancellation would constitute a  transfer of costs from the student share to taxpayers.  Taxpayers are already under strain, saddled with the cost of public health, prisons, pensions, and the trillions of dollars of debt inherent in neglected infrastructure. Students are under strain, too,  which makes the student loan issue one of the more nettlesome of the prominent issues facing the nation and its voters.

Does Borrowing Make a Borrower Worse Off?

            The math boils down to this:  if  borrowed money is invested in an asset with a rate of return greater than the rate of interest on the borrowed money, the borrower becomes better off financially; if the rate of return is less than the rate of interest on the borrowed money, the borrower becomes worse off.[1]   

         Put more simply: if the borrowed money is invested in a way that enhances ability to repay, the borrower's financial position improves over time.     If a student borrows money to buy the time needed to build an educational asset that will not only be personally rewarding but will also enable a net economic gain after loan repayment.[2]  However,  students who borrow money for college and then earn low grades will not add much to ability to repay. 

Should Low-income Students  Borrow Less or More than Middle-income Students?

          Borrowing does not make poor students poor; they are already poor. Poverty is the problem to be solved; for many poor students, a rigorous college education is a way to solve that problem. A well-regulated student loan program enables the poor students to earn the same degree as the higher income student who doesn't have to borrow from the student loan program.   

 Strategies for Growing the Net Benefits of College 

         Targeted high school preparation can reduce college costs and grow the benefits.   First up:  computer skills.   College is high-tech these days in virtually all disciplines across campus,  from science and engineering to social science, humanities, and fine arts.      Textbooks come with ancillaries such as websites,  electronic problem sets,  video clips, and tutorials.  Similarly, modern technology enhances communication with professors, teaching assistance, and other students.   The high school years are a good time to enhance computer skills.  

         Second: English and math are the languages central to the study of the wide range of knowledge available for guided study in college. The non-routine projects required during a rigorous college education require skill in writing,  revising, and editing essays as well as the intricate strategies for math problem-solving.   High school elective courses that require expository writing and word problems in math help prepare. 

The Danger of Borrowing Too Little

          Working at low-paying jobs that consume a lot of time and energy could be counterproductive.  Often the time would be better spent in pursuing high grades in a rigorous education, even though that path might require additional borrowing.    When prepared and mature enough,  students should borrow to buy the time needed to earn high grades.   

The Double Major Option

         As reports, some college majors have a higher lifetime financial pay-off than others.      Students whose passions are enlivened by a major with little likelihood of financial payoff might combine that interest with a more financially promising second major. For example, one of the high-paying engineering majors, or business finance or economics could combine with social science or humanities major. Such combined study can fulfill both intellectual interest and financial security, including the ability to repay student loans.  

         Education is a lifetime asset of greater value than any other. Borrowing enables students to enhance that value.  The next essay in this series includes suggestions for improving the loan repayment formulas to reduce the repayment burden so that students can more fully enjoy the benefits of their asset.     


William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.




[1] Private sector banking industry requires borrowers to pledge guarantees to the bank, called "collateral," of assets that the bank can take possession of should the borrower default on repayments. Federal student loan guarantees substitute for that collateral, and direct federal loans do not require collateral.


[2] See for data on the returns to college by type of degree and major course of study.


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