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Does it Still Make Sense to Borrow to Pay for College?

Student loan debt has suddenly popped onto the scene. Congress is grappling whether to continue a policy that keeps rates low, and President Obama is on a multi-state campus tour in which the subject frequently arises. Amid talk that student loan debt now exceeds credit card debt (see here and here), questions are being raised about the wisdom of borrowing to purchase a higher education. The Associated Press reports that students emerging from universities into the labor market face bleak prospects, meaning they'll have a tough time finding a job that will enable them to pay back the loans they've taken.

Historically, it's been an extremely very good idea to scrimp, save, and borrow to get a post-secondary degree. The returns to education in the 20th century were extremely high — the more grades you completed, the more money you made. End of story. Thanks to changes in the economy, in the cost structure of higher education, the calculus may be changing. And as Aaron Task and I discuss in the accompanying video, there's more to the numbers than meets the eye.

Let's start with the student loan/credit card debt ratio. To hear people tell it, there's been a huge and sudden increase in the amount of student debt outstanding, so much so that he amount of student debt is now larger than the amount of credit card debt. But that's not entirely true. Here's what happened. Every quarter the Federal Reserve Bank of New York publishes a report on debt in the U.S., breaking down America's collective I.O.U. into its constituent parts. But last year, the Fed realized it had been systematically undercounting the amount of student debt out there. Or as the Fed put it, "we came to realize that our aggregate reported student loan balance was at the low end of the substantial range of publicly available sources."And so the Fed changed its previously reported number. Student debt in the second quarter of 2011 was revised from $550 billion to $845 billion — up 54 percent. For the third quarter of 2011, student debt was about the same amount. As a result, the figures on student debt reported for 2011 are not apples-to-apples comparison to figures reported in 2008 and 2009. Student debt is high, but it's always been high in recent years.

What's more, the reason it now exceeds credit card debt is largely because credit card debt has fallen dramatically. As we've noted — check out the data here — thanks to charge-offs of bad debt and changing habits, America's collective credit card balance has fallen sharply since 2008 — from $989 billion in December 2008 to $795 billion in February 2012, a decline of 19.6 percent. The amount of credit card debt outstanding is basically at the same level it was in December 2003. Put another way, compared with a few years ago, Americans are more likely to borrow to invest in education than they are to borrow to invest in dinner at the Olive Garden. And in isolation, that's a good thing. A relative rise in college debt means that proportionally more resources are being used by people to acquire skills that theoretically will serve them well throughout their lives and improve the quality of the U.S. workforce.

Theoretically. The problem is that tuition dollars — whether they are purchased with cash or loans — simply don't go nearly as far today as they did 10, or 20, or 30 years ago. The relentlessly rising costs of higher education have changed the calculus. What's more, where university financial aid offices once looked to loans as a last resort — after work-study and scholarships — today loans are frequently seen as the beginning of financial aid packages. Finally, the ability to get an adequate return on investment depends on a lot of factors — what type of school a student is attending, the degree they're obtaining, the amount of debt needed. Does it make sense to borrow $200,000 to get a medical degree from a prestigious university? Absolutely. How about borrowing $150,000 to get an undergraduate degree in anthropology from a non-prestigious private university? Probably not so much. Given the state of the job market, it may make sense to borrow $70,000 to get a degree in childhood education from a public university, but not to borrow $140,000 to get the same degree from a private university. The earnings power of an elementary school teacher just can't support that level of debt. And it makes far more sense to borrow several thousand dollars to pursue an associate's degree in nursing at a community college than it does to borrow tens of thousands of dollars from a for-profit university.

Forty years ago, the answer to the question "Does it make sense to take on student loans?" was generally an emphatic "Yes." Now, the answer is more like "it depends."

Daniel Gross is economics editor at Yahoo! Finance

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com

His new book, Better, Stronger, Faster: The Myth of American Decline and the Rise of a New Economy, will be published in May by The Free Press.