Grads with Debt in US – The burden of student loan repayment diminishes rapidly as earnings grow, but difficult in some fields finds Brookings

In this second economic analysis in the Major Decisions series, The Hamilton Project turns to the question of loan repayment. The analysis explores the relationship between earnings growth over one’s career and the relative burden of debt repayment across 80 majors. Specifically, we examine the share of monthly earnings needed to make monthly loan repayments for each major under the traditional 10-year repayment plan. Accompanying the analysis is a new interactive feature that combines a debt repayment calculator with major-specific earnings trajectories, allowing the user to see what share of earnings will go to debt repayment for each year of the repayment period.

The analysis yields the following key conclusions:

First, earnings trajectories differ across majors but nearly all of them show rapid growth in the early-career years.

• Graduates see steep earnings growth in the first five years after earning a degree: the typical increase in median earnings over this period is 65 percent. This implies that a focus on earnings right out of school—either as an indicator of earnings potential or loan repayment ability—can be misleading.
• Graduates from majors with lower initial earnings are more likely to see faster earnings growth in early-career years. In the first five years after degree receipt, graduates in some of these majors show increases of over 100 percent while graduates from other majors see gains of no more than 30 percent.

Second, the burden of student loan repayment diminishes rapidly as earnings grow, but it can still be difficult for the graduates of some majors under typical repayment strategies and loan levels.

• For a bachelor’s graduate who borrowed, and who had typical earnings and student debt, payments under the standard 10-year repayment plan take up 14.1 percent of earnings in the first year, but only 6.5 percent of earnings in the tenth year.
• Among borrowing graduates with typical earnings and debt levels, eight in ten will pay more than 10 percent of their earnings in the first year of repayment. However, fewer than one in eight will pay such a share of earnings in the fifth year, and none will by the tenth year.
• However, the share of earnings necessary for loan repayment varies substantially across majors. With typical earnings and student debt, borrowing graduates in drama and theater face payments of 24 percent of their earnings during the first year of repayment, with this fraction gradually falling to 10 percent during the tenth year. Graduates from energy and extraction engineering, on the other hand, experience repayment shares of only 7 percent and 4 percent, respectively, over the same horizon.
• Because student loan debt is fairly similar across majors, the spread in earnings repayment shares over the majors is mostly driven by differences in earnings trajectories.
• This mismatch between the timing of repayment of student loans in early career and higher earnings in mid-career can be mitigated in part through income-based repayment plans. For borrowers with debt of $26,500—the typical or median amount—99 percent of graduates would qualify for the most generous income-based repayment plan in the first year of the career, 82 percent would in the fifth year, and 54 percent would in the tenth year.

via Major Decisions: Graduates’ Earnings Growth and Debt Repayment  »  Papers  »  The Hamilton Project.