Wage Stagnation among College Graduates and Senator Warren’s Plan to Help

Earlier this month, we released our “Class of 2014” report on the labor market and earnings prospects for the high school and college graduates of 2014. In short, things don’t look great. The prolonged slack in labor demand—unemployment for college graduates is 8.5 percent compared to their 2007 levels of 5.5 percent—has depressed earnings for the majority of recent graduates. To make matters worse, student loan debt reached an all-time high of about $1.2 trillion. Coupled with young college graduates’ stagnant wages, student debt poses an obstacle to graduates seeking financial security.

The figure below shows the real average hourly wages of young college graduates (ages 21-24) by gender. Inflation-adjusted hourly wages fell by 6.9 percent for college graduates since 2007, which means full-time, year-round workers are earning $2,600 less in total annual wages. What’s more, the downturn has only exacerbated the wage stagnation young college graduates were already experiencing. Wages for all college graduates fell 0.9 percent between 2000 and 2007, from $18.41 in 2000 to $18.24 in 2007. Female college graduates saw their wages decline by 4.6 percent over that time period ($17.82 to $17.00). Male college graduates did experience a 3.7 percent increase in hourly wages from 2000 to 2007, but those mild gains were quickly erased by the Great Recession. College graduates simply did not see any signs of consistent wage growth prior to the Great Recession. Clearly, it is not necessarily the case that as long as you obtain a college degree, you’ll be gainfully employed and well compensated.

The class of 2014—most of whom started college after the Great Recession was officially over—likely figured that by the time they graduated the labor market would have recovered to the point that their job prospects and future earnings would make their student debt manageable. Sadly, this has not been the case, and the effects will likely be long lasting.

Graduating into an economic downturn not only translates into lower wages in the short run, it has also been shown to reduce earnings for graduates for up to 10 to 15 years after graduating. In a recent study, researchers tracked individual income tax records from 1982-99 to examine how cohorts of young college graduates fared in employment and earnings after graduating. They found that graduating into a recession caused “cyclical downgrading,” or the acceptance of lower quality jobs due to economic downturns, thereby reducing graduates’ earnings for up to 10 years. Researchers at Yale University confirmed earlier findings of persistent earnings penalties from graduating into a recession and also found that occupation match quality, which they defined as being employed in one of the top five most common occupations for their major, was lower over that same time period. Given the persistently high unemployment of the Great Recession, we can reasonably expect that the career and wage penalties for young graduates will be particularly stubborn and severe.

Many of these graduates are therefore left to face the very real possibility of not being able to find a job that would pay enough for them to repay their student loans. According to a recent Pew Research Center study, in 2010, 40 percent of households headed by adults under 35 had student debt—an average of $26,842, the highest among any age group. Students have a grace period of six months after graduation before their first loan payment is due—six months to find a stable job that pays a decent enough wage that they will be able to begin repayment. If they are not successful, recent graduates may be forced to miss a payment or default altogether on their loans, damaging their credit scores and hurting their future financial prospects.

What makes student loans particularly difficult is that unlike loans for homes, under current law, student loans cannot be refinanced. This is especially problematic given that interest rates on some federally-sponsored student loan plans are set to rise substantially on July 1.

Cue Senator Warren’s new bill to refinance student debt. This bill would let recent graduates refinance all federal FFELP and Direct loans, as well as private student loans, to rates offered to new federal borrowers in the 2013-2014 school year. While the student loan program currently provides net revenue to the federal government, it is true that Warren’s plan would reduce this surplus. To offset this reduction, Warren’s proposal would implement a variation on what has become known as Buffett Rule to bring in additional revenue. The Buffet Rule increases taxes on the highest-income households by closing loopholes in the tax code that currently often let them pay extremely low tax rates.

Recent college graduates already face a myriad of hurdles in the current labor market: lower wages than entrants 15 years ago, and higher unemployment and underemployment, to name a few. Given how depressed wages are for this group, refinancing not only makes sense, it’s a much needed reprieve.