Is there such a thing as "good" college debt?

As balloons were dropping during the two major political conventions, White House economists quietly released numbers that should deflate some long-held ideas that all student debt is bad.

Last year some 9 million college students took out loans, which a report by the President's Council of Economic Advisers calls a debt that -- when accompanied by a degree -- usually "pays off." That's because bachelor's degree recipients earn $1 million more in their lifetime relative to those with just a high school diploma.

Also part of this payoff is that college graduates pay taxes, vote more and live longer than those without degrees. A disturbing part of the report, though, noted that those with relatively small debts and those who attended for-profit colleges had much higher loan default rates. Students with loans of $10,000 or less accounted for two-thirds of all defaults.

The takeaway was that those with small loan balances were more likely to walk away from college without a degree and were less able to pay their loans back. Surprisingly, those with higher debt -- mostly likely having earned degrees -- were more likely to buy homes than those who didn't graduate.

While much more needs to be said about how much student debt has helped or hurt the U.S. economy, the broader question is whether there's such a thing as "good" or "bad" college debt.

Ultimately, how economists measure the impact of college debt may be an academic argument at best. It depends on what you earn over decades and whether debt is considered a worthwhile investment in human capital -- what you can earn given a specific skill set.

If you get a medical degree, for example, and accumulate more than $100,000 in loans, but then pay them off and have a prosperous career, it's worth the price. But if you rack up loans and can't find a job, or end up working several jobs to pay your bills, it's not.

Should you want to do the math, here's a little back-of-the-envelope work you can do before you get into debt. It takes advantage of available data on how much specific degrees and colleges are likely to produce in terms of income.

STEM-related degrees (for science, technology, engineering and math) can net you the highest post-graduate incomes at the moment. However, doctors and surgeons still dominate eight out of 10 top-paying occupations, reporting annual median incomes of $187,000, according to the U.S. Department of Labor.

Want to drill down further? Ideally, you would want to divide your expected salary by your annual debt payments to get a debt-to-income ratio. In the credit and lending world, the lower the number the better.

A reasonable benchmark is to pay no more than one-third of your income on debt repayments relative to your salary. That's a thumbnail for housing costs as well. Less debt is always more desirable.

The college debt ratio, though, gets squishy because you have to consider payback on the degree you get. If you're going into a technical field, the payback may be quick, and you may be able to pay off your loans sooner, so a tolerable debt-to-income ratio may be higher.

With college debt, however, there's no absolute rule on a "good" and "bad" ratio. It's like buying a stock. Some investments are good values that provide a decent return on investment (ROI) while others don't; ROI isn't always easy to predict. And the degree you get may not have any relation to your success, which may come in a completely different field.

The debt argument gets even more muddled when you consider that specific degrees and even colleges have more relative long-term value -- in terms of future salaries -- than others. But that may not always be the case as industries change.

One way of divining whether you're taking on good or bad debt is to look at potential future earnings from a given degree. Again, you have to do some research, and there are always surprises.

An acute-care nurse practitioner, for example, can net you the highest earnings after 10 years for those with graduate degrees -- at $103,000 -- according to PayScale, a service that measures the earnings potential of occupations and college degrees. Note that you need a master's degree and a lot of specialized training for this profession, which is typical of the highest-paying careers.

While it's generally true that the more education you receive the higher your lifetime salary, outliers always exist.

A lot of lawyers and disenchanted doctors are unemployed. Almost every industry is changing in a profound way, so you can't reliably look at past salary records and expect trends to continue in our age of automation, restructuring and globalization.

What if you don't want to crunch the numbers and just want to follow your passion? Nothing wrong with that. Just consider if your projected income can cover loan repayments plus basic living expenses such as rent, food, health care and transportation, and discretionary expenses like entertainment.

At the very least, before you even sign on the dotted line for student loans, do a repayment ballpark estimate. Compare that with what you'll likely earn in a chosen profession or field.

Nearly any college or high school counselor can give you some idea on these numbers, or you can use the government's free loan repayment estimator tool. You can also see what various jobs are paying by searching the Occupational Outlook Handbook, which is compiled by the U.S. Bureau of Labor Statistics.

Nobody likes to do budgets, but if you anticipate having a student loan bill, it's essential to plan ahead. Since college debt can't be dumped like a car you can't afford, this is one expense that's difficult to hack.

While reducing the cost of college is generally a good idea if it enables more people to thrive in a complex global economy, we need to see debt in a different light as well: It can leverage our innate abilities or hold us back from prosperity.

  • John Wasik

    John Wasik is the author of The Debt-Free Degree and 15 other books. He writes and speaks regularly on personal finance issues throughout North America.