How to 'De-Risk' Postsecondary Education in a Recession
Impending COVID-19-induced recession has student loan debt holders worried. How can we lower the risk of pursuing education during a recession?
Postsecondary education is one of the most valuable investments a person makes in their lifetime, on average leading to higher earnings, improved health outcomes, and reduced dependency on social welfare programs. A highly educated and well-trained population also produces several economic benefits, such as lower unemployment rates and higher wages, even for those without a degree. There is even evidence that workers with postsecondary credentials are more capable of maintaining steady employment when the economy faces a recession.
While on average the value of postsecondary education—whether it is traditional higher education degrees or skill-focused vocational training—justifies the cost of attendance, that is not the case for all students. Life events can disrupt enrollment, leaving students with fees paid but no degree to show for it. The quality of the education the student receives might turn out to be poor. The student may choose a field of study that does not lead to a well-paying career, or perhaps that field of study was promising at the time of enrollment but its labor market value has declined by the time of graduation.
But perhaps the most significant risk that students bear—and the one that they have least control over—is the prospect of graduating during an economic downturn, having paid a high cost of attendance with little benefit, or saddled with high debt burdens that they cannot pay off. This risk is particularly relevant now, as many experts believe that as the Federal Reserve raises interest rates to combat inflation, the economy may soon enter a recession.
There are two potential approaches to protect students from the risks associated with entering the labor market during a recession. First, the risk of low earnings caused by a recession could be shifted from students and onto schools, finance providers, or other entities. And second, students’ cost of attendance could be reduced. While neither of these approaches eliminates risk entirely, both can effectively “de-risk” the system to protect students and to support the higher education system and the economy as a whole.
A “Catastrophic” Impact on New Graduates
While a recession would be painful for all workers, it would be especially catastrophic for students who are about to enter the labor market, many of whom have student loans to repay but might have difficulty finding well-paying jobs. Recent graduates are disproportionately harmed by recessions because businesses prefer to slow their hiring rates rather than fire existing employees, and businesses that lay off employees often target those with less seniority. Consequently, during recessions, the unemployment rate rises faster for recent graduates than for other college graduates.
There are two potential approaches to de-risk education: (1) shifting the risk of low earnings away from students and onto schools, finance providers, or other entities; and (2) reducing students’ overall cost of attendance.
This is particularly damaging to recent graduates because, when the economy is in a normal state, individuals typically experience their highest growth in earnings during their first few years in the labor market as they continually move into better-paying jobs. Indeed, several studies have shown that entering the workforce during a recession reduces one’s earnings for up to 15 years compared with those who enter the workforce in a prosperous economy. Some estimates imply that a moderate recession—one that raises unemployment by 3 percentage points—could lead to losses on cumulative earnings of around 60 percent of a year’s income. A recent study estimates that college students who graduated during the COVID-19 recession (2020 and 2021) will be hit with lifetime earnings losses of 3.8 percent for 2020 graduates (around $115,900) and 2.6 percent for 2021 graduates (around $81,600)—an effect that will be felt particularly acutely by students once the final federal student loan repayment pause expires on December 31, 2022.
Even if the U.S. economy does not slide into a recession this year, future students will experience growing risk, as evident by various economic factors. For instance, there have been 13 recessions since the end of World War II, or about one every six years, making them a common feature of the American economy. Moreover, tuitions continue to rise across institutions. In the past 30 years, the average annual tuition at four-year public schools has ballooned from just over $4,000 to nearly $11,000, while tuition at private nonprofit four-year schools has risen from just over $19,000 to roughly $38,000, after adjusting for inflation. While President Biden’s recent debt cancellation is a welcome relief to the millions of students struggling with student loans, it does little to arrest the rising tuition prices behind the burden.
Enrollment rates continue to fall as students are increasingly questioning the value of postsecondary education, especially whether the high cost of traditional degrees is worth it. The risks that recessions and other events pose to postsecondary education’s value proposition may deter students—especially those who are debt-averse or from low-income backgrounds—from pursuing postsecondary education, thus forgoing a significant opportunity for economic advancement.
De-Risking Postsecondary Education
Approaches that shift the risk of low earnings away from students include income-driven repayment plans in the federal loan system, as well as outcome-based financing models, such as income share agreements or deferred-tuition agreements. These approaches help protect students from the risk of a recession, because monthly payments are required only if a student makes sufficient income, and students never pay more than a certain share of their income.
This means that during economic downturns, students are protected from unbearably high monthly payments and the damage to their credit associated with delinquency and default. As of now, a handful of institutions and organizations support outcomes-based financing, including the San Diego Workforce Partnership, Social Finance, Purdue University, Google.org, the University of Utah, and a variety of liberal arts colleges and boot camps.
A risk shift could also be accomplished through a product that insures the student against low earnings. Under this approach, the student either pays tuition upfront or uses traditionally structured student loans and receives a benefit (e.g., cash or loan payments) if postgraduation earnings fall below a certain threshold. For example, loan repayment assistance programs—which are particularly common at law schools—make monthly loan payments on behalf of the student if they experience low earnings. Similarly, degree insurance makes a payment directly to the student if their income falls below a certain level, regardless of whether they financed their education with a loan.
Another way to protect students against the risk of low earnings is to reduce or eliminate the cost of higher education to the student. There is substantial precedent for this approach, including Pell Grants and state and local funding for in-state students at public institutions. While the Pell Grant maximum award has failed to keep up with tuition costs, bills have been introduced in Congress to double the maximum award amount. Although these bills have not been passed, the maximum Pell Grant award did increase modestly for the 2022-23 award year, from $6,495 to $6,895. Another example of cost-shifting is programs, available in nearly 30 states, that allow individuals from low-income households to attend in-state community colleges or public colleges/universities tuition-free. These efforts to reduce the cost of education also help shield recent graduates from the uncertainties of student loan repayments during a recession.
It should be noted, however, that even tuition-free education carries risks for the student, given that they will still invest their time and effort, and possibly forgo wages, in order to attend school. Accordingly, any attempt to reduce college costs should be coupled with mechanisms to ensure that institutions are providing students with quality education that leads to career success, though with an understanding that schools might have more difficulty achieving these results during recessions. Moreover, policymakers might consider targeting these cost-reduction efforts at students most in need of the benefits, such as low-income and first-generation students.
Finally, the labor market’s continued reliance on bachelor’s degrees as a signal of skills forces students to pursue expensive degrees rather than less expensive (and therefore less risky) training programs and credentials that may nonetheless provide highly valued skills. Vocational training such as bootcamps may offer cheaper and faster routes to postsecondary credentials, but these students often lack access to federal financing options, requiring students to use more expensive private financing or pay tuition up-front. A longer-term de-risking strategy would include reducing the primacy of bachelor’s degrees and opening up more job opportunities for workers with nondegree credentials.
Postsecondary education is a significant investment of money, time, and effort, and the risk that this investment does not pay off often deters prospective students from pursuing opportunities for economic advancement. In the face of postsecondary enrollment declines (which predate the COVID-19 pandemic) and a prolonged period of productivity stagnation, de-risking postsecondary educational opportunities is a vital component of a broader agenda for economic advancement for all.