College Lessons: The Financial Risks of Dropping Out

K. Porter, BROKE: HOW DEBT BANKRUPTS THE MIDDLE CLASS, Stanford University Press, 2012

UC Irvine School of Law Research Paper No. 2012-2

Posted: 10 Jan 2012 Last revised: 2 Jun 2012

See all articles by Katherine M. Porter

Katherine M. Porter

University of California - Irvine School of Law

Date Written: January 9, 2012

Abstract

Educational policy is dominated by arguments to expand education. But the protective benefits of education are not linear, and not every educational effort after high school provides a corresponding financial advantage. In fact, Americans who have some college credit but did not earn a degree appear to be particularly vulnerable to financial failure. This chapter in the edited volume, Broke: How Debt Bankrupts the Middle Class (Stanford Press, 2012; ed. Katherine Porter) examines the overrepresentation of people with “some college” education in bankruptcy.

In 2007, more than 43 percent of people in bankruptcy had some post-secondary education but did not earn a four-year college degree. At the time of bankruptcy, the incomes of people with some college and those with only high school educations are similar. However, those with some college have higher debt burdens. These findings may indicate that those with some college borrow to finance consumption on levels similar to higher-earning college graduates or that those with some college are willing to endure a long period of financial distress during which debts accumulate before resorting to bankruptcy. Student loans add to the debt burdens of those with some college. Among people in bankruptcy, borrowers who did not complete their educations have nearly identical student loan debts to borrowers who did earn their degrees. Over half of bankruptcy debtors without a four-year degree owed more than $10,000 in student loans. These obligations weigh heavily on those with some college, whose lifetime earnings are likely to be substantially lower than college graduates.

While a college degree may pay (people with bachelor’s degrees or higher educational attainment are underrepresented in bankruptcy), an attempt at college may not. The bankruptcy data suggest that college attempts escalate the risk of financial failure. In promoting education, policymakers should be more aware of the financial consequences of attempting but not completing college. Bankruptcy law can have a modest role in softening the risks of college attempts by relaxing the prohibition on bankruptcy discharge for student loan debt owed by people who did not complete their degrees. Such a change has the potential to affect student lending, college tuition structures, and college admittance procedures. Perhaps most importantly, debating such a reform would call attention to the fragile economic state of the one-quarter of the American population who attempted college but did not earn a degree.

Keywords: student loans, bankruptcy discharge, bankruptcy, consumer bankruptcy, financial distress, consumer debt, college education, bankruptcy demographic, student borrowing

JEL Classification: D12, D14, D78, I38, K35

Suggested Citation

Porter, Katherine M., College Lessons: The Financial Risks of Dropping Out (January 9, 2012). K. Porter, BROKE: HOW DEBT BANKRUPTS THE MIDDLE CLASS, Stanford University Press, 2012 ; UC Irvine School of Law Research Paper No. 2012-2. Available at SSRN: https://ssrn.com/abstract=1982226

Katherine M. Porter (Contact Author)

University of California - Irvine School of Law ( email )

401 E. Peltason Dr.
Ste. 1000
Irvine, CA 92697-1000
United States

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