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Dr. Richard ValachovicIn this month’s letter, Dr. Rick Valachovic shares principal findings from an encouraging recent analysis of student indebtedness and considers the study’s implications for dental education.

Hold on to your hats. When it comes to student indebtedness, the picture may be far less bleak than we’ve been led to believe.

“[T]ypical borrowers are no worse off now than they were a generation ago,” write Beth Akers and Matthew Chingos in a 2014 report published by the Brown Center on Education Policy at the Brookings Institution. Beth, a Fellow in the institution’s Center on Children and Families and at the Brown Center on Education Policy, spoke about the report, Is a Student Loan Crisis on the Horizon?, at the ADEA Deans’ Conference last fall. What she had to say was both startling and reassuring.

The report’s findings (updated) upend the conventional wisdom that is bandied about in the popular media—that increased levels of student indebtedness for all types of students are condemning the current generation to a bleak future. Accounts of excessive borrowing and personal hardship give the impression that all of today’s students are suffering. Beth’s research tells a far different story.

Using 1989–2010 data from the Survey of Consumer Finances administered by the Federal Reserve Board, she and her co-author looked at how educational borrowing levels and incomes evolved within households led by adults aged 20 to 40. Not surprisingly, the authors found a significant rise in the level of student loan debt these households carried and a considerably smaller increase in annual household incomes. But while many people look at these data and jump to the conclusion that today’s holders of student debt are worse off, Beth and her colleague conclude that, “Increases in debt may be a benign symptom of increasing expenditure on higher education.”

“The right way to think about debt,” Beth told me, “is that debt is used to finance an investment that pays off over the lifetime. Your debt may have increased by $5,000 and your income by only $1,000 a year, but when you add it up over a lifetime, that additional income swamps the increase in debt you’ve taken on.”

When it comes to dental education, this finding supports a view I have long held: that dental education is an excellent investment despite its high cost. There’s no question that debt-to-income ratios have been rising in dentistry and other high-income professions in recent years. A paper published in the Journal of the American Dental Association (JADA) in November found that the average educational debt held by dental graduates was 103% of median income in 2011, up from 70% in 1996. But while this percentage represents a significant increase, it doesn’t negate the bigger point made by the Brookings study: that increases in average lifetime earnings have “more than kept pace” with increases in student borrowing.

Indeed, the Brookings report finds that about one-quarter of the rise in student debt over the two decades studied is attributable to the fact that more Americans are seeking higher education and that more of those individuals are pursuing graduate degrees.

“Prior to this paper, people were looking at debt burden in terms of the debt-to-income ratio, but to me the burden of debt is much more appropriately measured by looking at how much you have to pay in a given month to service that debt versus how much you have to spend on consumption,” Beth explains. “That’s the debt payment-to-income ratio that we published. The popular narrative would have you believe that households are being swamped by these payments, but on average, people are spending about 4% of their monthly earnings on debt repayment.”

According to Beth, that number has not increased over time. In fact, the data would suggest it may have decreased, further strengthening her conclusion that on average, educational borrowing is as sound an investment today as it has been in the past, and not just for dentistry. From time to time we hear that some dental hygiene graduates are struggling to find employment, but that appears to be a localized phenomenon. The Bureau of Labor Statistics reports that employment of dental hygienists is projected to grow 19% from 2014 to 2024, much faster than the average for all occupations, and U.S. News & World Report ranks dental hygiene number five on its 100 Best Jobs list.

At this point, I’m guessing there may be skeptics among you who remain unconvinced. You might be asking: Even if today’s average monthly student loan payment represents the same portion of income as it did 20 years ago, what about the fact that borrowers are taking almost twice as many years to pay off their debt? Doesn’t that constitute an increased burden?

Mert Aksu, D.D.S., J.D., M.H.S.A., Dean of the University of Detroit Mercy School of Dentistry, raised this very point with me and others after hearing Beth speak in October. Mert is concerned that dentists who are still paying off their loans will find it harder to fund their retirements, and he is particularly concerned about how this possibility might affect those who choose employment over owning their own practices. Historically, Mert pointed out, the dental practice itself has constituted the largest asset a dentist possessed at the time of retirement.

The Brookings study does not address the issue of retirement savings, but Beth told me the longer repayment period is not a cause for concern when looked at in strictly financial terms. From this perspective, lifetime earnings still outweigh the cost of student borrowing today just as they did in the past.

All that said, there may be less tangible costs associated with increased student indebtedness. One recent study using 1997 data found a small but significant inverse relationship between student debt and psychological well-being. In a posting on the Brookings website, Beth acknowledges that “It may be the case that debt imposes emotional costs,” but tempers that scenario by adding, “the treatment of student debt by the popular media has almost certainly caused some borrowers to worry about their debts more than they would have otherwise.”

In Mert’s view, changes in the market for dental care should also be factored in when considering the potential burden of indebtedness on our current and future graduates. He rightly points out that much of the growth in the dental market is occurring in Medicaid and other less well-reimbursed sectors. Mert speculates that, over time, this trend could depress those lifetime earnings the Brookings study is banking on.

Much of the discussion within our community about the growth of dental student indebtedness has centered on a related concern: whether high levels of educational debt might discourage newly minted dentists from providing care in underserved communities. To get a perspective from the practice community on this and other issues, I called Marko Vujicic, Ph.D., Chief Economist and Vice President of the American Dental Association (ADA) Health Policy Institute. Marko is one of the authors of the JADA paper I mentioned above, which looked at the effect of educational debt on dentists’ career choices.

According to Marko and his colleagues, their research indicates that high debt levels do influence some career decisions, but that gender and race are much better predictors of where dentists choose to practice and whether they choose to treat Medicaid patients or provide charity care.

“To the extent that you accept our results,” Marko told me, “you should explore interventions outside of debt relief if you want to influence career choice.”

Marko’s comments raise the question of whether current policy proposals aimed at lowering student debt levels are well designed to achieve larger societal goals. Beth is concerned that some proposed policies would benefit those who are most able to meet their debt obligations and do little for those who truly need help.

“Policymakers need to recognize that debt is not a bad thing,” she argues. “Debt without a means to pay is the thing that we need to be worried about.”

Beth points out that policies such as student loan refinancing at lower interest rates would disproportionately benefit people with large outstanding debt—the very people, research shows, who tend to earn high incomes.

“Things like income-driven repayment plans, which we’ve seen expanded in the last two years, are really a step in the right direction,” Beth believes. “These plans ensure that those who have made investments in higher education that didn’t pay off won’t be stuck with unaffordable monthly debt payments.”

Marko also warns that poorly conceived policies can create as many problems as they solve. He told me some economists oppose providing student debt relief because it takes the onus off schools to address rising tuitions. Likewise, in economic terms, the availability of federally subsidized student loans artificially lowers the cost of preparing for a professional career, potentially stifling the development of innovations that would reduce the cost of higher education.

“It comes back to what you’re trying to achieve,” Marko said. “Broad-brush policies can reduce the cost of education for everyone in America, but if we want to achieve different societal objectives, such as getting dentists to practice in underserved areas, a more targeted set of loan forgiveness policies would be more effective in achieving this end.”

When I asked Marko if the dental education data conform to Beth’s assessment that increased student debt reflects a largely positive development—increased investment in higher education—he responded, “Absolutely. Look, your dental education is an investment, and it’s a privilege to have an earnings stream as a dentist. You have to look at these questions in that context.”

I couldn’t agree more.

Related content from previous issues of Charting Progress
August 2014, A Dental Education Remains an Attractive Investment
September 2013, Getting a Handle on Educational Costs and Borrowing
February 2012, Student Debt: Cause or Symptom of Current Ills?
December 2009, Dental Hygiene Program Capacity: Finding the Right Balance
September 2006, Paying the Price