When it comes to securing a successful financial future for millennials, college completion pays off
A key theme in the news and in policy circles has been the challenges facing millennials, whether it is job prospects, wages, or student debt. However, a piece often overlooked in the conversation is the fact that one segment of the millennial population is faring far better than others: those with a college degree.
A recent study we conducted in collaboration with the research firm Ipsos found young adults with a college degree are more likely to have a job, earn higher wages, and own a home, even with student loans. The findings clearly show a college degree commands a significant earnings premium over a lifetime.
By contrast, young adults who start college but leave before earning a degree report lower financial health than young adults with degrees and even those who did not start college at all. We found that non-completers have the lowest income of all education levels. In addition, young adults who left school without a degree tend to have lower credit scores, be more likely to have trouble meeting their financial obligations, and are less likely to own a home, compared to those with a degree. Recent research by the White House Council of Economic Advisors found that college completion is a major factor in student loan repayment success. Undergraduate borrowers who did not complete are three to five times more likely to default on their student loans than those who graduated.
Non-completion is a growing concern. In fact, two-thirds of all defaults owe less than $10,000, a sign of non-completion. Today, there are approximately 36 million Americans who attended college but did not earn a degree, according to an analysis of U.S. Census Bureau data by the Lumina Foundation.
Our day-to-day interactions with tens of millions of customers over the past 40 years reinforce the finding that borrowing by individuals who do not complete is the real student loan “crisis,” as they often have the biggest financial gap when it comes to repaying student loans.
Flexible programs like income-driven repayment that tie monthly payments to income can help borrowers stay on track with their student loans. Program complexity, however, can discourage these borrowers from completing the lengthy documentation. Without a doubt, reducing the complexity and simplifying the enrollment and re-enrollment process would help ensure those who need financial relief get it.
While a valuable solution for those in need, these programs and solutions address the back-end in the student loan cycle, after an individual has already borrowed — and potentially left without a degree. What our research tells us is that more can and should be done before students select a school, chose a program of study, and sign up for student loans to ensure young people have better information so they can make what is likely the first — and one of the biggest — financial decisions of their life.
Students deserve information on what the degree will cost, not just the semester, and, if they are considering borrowing, they need a clear understanding of the full costs and consequences of borrowing. And they need this information before deciding whether and where to go to college.
That’s why we have recommended that federal loan borrowers receive a multi-year award letter showing the full cost of the degree as well as expected grants, loans, and family contribution, as opposed to the current practice that provide information one year at a time. Borrowers should also receive clear loan disclosures, similar to Truth in Lending disclosures provided with other consumer loans. There are opportunities to invest more time and resources in a financial counseling program that emphasizes the importance of college completion.
Completion is critical because our study shows that regardless of whether a degree holder borrowed to earn his or her degree, the benefits generally accrue just the same. Individuals with an associate’s degree or higher have higher self-assessments of their own financial health compared to those without a degree, regardless of student loans. Borrowers who graduate are also as likely to have a good or excellent credit score compared to peers at the same education level who did not borrow. And contrary to the popular narrative, borrowers and non-borrowers with a degree are equally likely to have a mortgage.
Money Under 35 shows that degree completion often relates to the financial well-being of young adults. As policymakers continue to discuss solutions to lower the burden of student debt, address the cost of college, and increase job opportunities for American workers, establishing programs that help provide students the information they need to make informed decisions before they borrow is a good place to start.