Is College a Good
Investment?
Beth Akers
Brown Center on Education Policy
November 2013
1
…by 2020, America will once again have the highest
proportion of college graduates in the world.
President Obama
(State of the Union Remarks, 2009)
2
…my Administration will release a new “College
Scorecard” that parents and students can use to
compare schools based on a simple criteria: where
you can get the most bang for your educational buck.
President Obama
(State of the Union Remarks, 2013)
3
Is college a good investment?
•
What are we asking, exactly?
» A theoretical framework
•
What do we know?
» Existing evidence
» Some new findings
•
What should we do about it?
» Policy recommendations
4
Theoretical Framework
•
Education creates public and private returns
» Public return
– Neighborhood effects
– Justification for subsidies
» Private return
– Financial (wages)
– Non-pecuniary
5
Private Financial Returns to College
•
Why?
» Easy to measure
» Important for public policy
•
Human Capital Theory
» Individuals invest in education to the extent that it
increases lifetime earnings
6
Private Returns to Education
7
The Cost of College
•
Among full-time undergraduates at public and private
nonprofit four-year institutions, the median published
tuition and fee price in 2013-14 is $11,093.
•
Most students pay less than published tuition and fees
•
Net cost rising more rapidly than inflation
•
Opportunity cost – estimated $54k
8
Trends in Published Tuition and fees 1971-2012
9
Labor Market for College Grads
•
Growing wage differential - $15,000 (HS/BA, 2011)
•
Lower rates of unemployment
»
September 2013
– 3.7% unemployment for BA degree
– 7.2% among high school
10
Median Earnings of Full-time Workers by
Educational Attainment (2011)
11
Financial Returns to College
• Difficult to measure
» Correlation or causation?
• 1 year of college  10%
• Over lifetime
» BA: $570,000, Associates: $170,000
» Over the last 30 years, the increase in lifetime
earnings brought by a college degree has
increased by 75 percent, whereas costs have
increased by 50 percent
12
Q: Is college a good
investment?
13
Q: Is college a good
investment?
A: Yes
(for most students).
14
Variation in Outcomes
• Large variation in outcomes across
students, institution and fields of study.
• According to Pay Scale data as many as
200 4-year programs may have
negative ROI
offer higher returns t han less select ive ones. Even within a school t ype and selectivit y cat egory,
the variation is st riking. For example, the average ROI for a competitive public school in 2010 is
9 percent, but the highest rate within this category is 12 percent while the lowest is 6 percent .
15
Figure 2
Return on Investment of a Bachelor’s Degree by Institution Type
14%
12%
Private, not-f or-prof it
Public
10%
8%
6%
4%
2%
0%
Source: Schneider (2010).
Note: Data uses PayScale return on investment data and Barron’s index of school selectivity.
Another important element in est imat ing the ROI on a college education is financial aid, which
lifetime earnings of a high school graduate.
16
Work-Life Earnings, In $Millions
Figure 3
Work-Life Earnings of Bachelor's Degree Holders by College Major
4
3.5
3
2.5
2
1.5
1
0.5
0
Source: Julian (2012).
Note: Synthetic work-life earnings estimates are calculated by finding median earnings for each 5-year age
group between 25 and 64 (25-29, 30-34, etc.). Earnings for each group is multiplied by 5 to get total
earnings for that period, then aggregated to get total lifetime earnings. This is done for high school
graduates, bachelor's degree holders, and bachelor's degree holders by major.
17
Conflict with Popular Narrative
• Outstanding debt passed $1 trillion
• Media provides anecdotes of graduates
in financial distress
» Basement dwellers
• How does this reconcile with other
evidence?
18
19
The Truth About Student Loan Debt
• Average student borrows $25k for BA
» ($24k at public, $30k at private)
• In 2010, average outstanding debt
among ages 20-40 is $6,500
• Average monthly loan payment: $144
• Average earnings: $44,000
20
Debt Outstanding in Young Adulthood
Table 1. Incidence and Amount of Debt Over Time, Age 20-40
Those with Debt
Year
Incidence Mean Debt
Cell size
Mean
Median
1989
14%
$806
$5,810
$3,517
971
1992
20%
$1,498
$7,623
$3,730
1,323
1995
20%
$1,475
$7,521
$3,577
1,429
1998
20%
$2,539
$12,826
$8,027
1,362
2001
22%
$2,881
$12,939
$6,156
1,307
2004
24%
$3,402
$14,204
$7,503
1,246
2007
28%
$4,583
$16,322
$9,728
1,144
2010
36%
$6,502
$17,916
$8,500
1,865
21
Trends in Debt over Time, Households with Average Age 20-40, 1989-2010
22
0
.00005
.0001
.00015
Distribution of Education Debt, 1989/1992 and 2010
0
20000
40000
60000
Total Education Debt
1989/1992
80000
2010
100000
23
Review
• College pays off for most students
• Education debt crisis is not on the
horizon
• What now?
» Focus on the minority who do face
bad outcomes.
24
Next steps - Research
• Identify groups facing bad outcomes
• Identify institutions producing bad
outcomes
» Individual or categories
25
Next steps- Policy
• Institutional accountability
• Create sophisticated consumers
» Financial literacy
» Availability of information
• Safety nets are critically important
» Income based repayment system