Tuesday, September 27, 2016

College Education: Is it Worth the Investment?

Don Siegel

Many youth focused programs continue to promote the notion that a college education is vital for kids to have successful futures. Yet, a recent survey[1] found that Americans are increasingly questioning this belief, with only 42% agreeing that college is necessary for being successful in the work force. This is down by 13% with those who agreed with this assertion in 2009. On the other hand, the survey found that 57% agreed with the statement that there are many ways to succeed in today’s world without a college degree. This represented a 14% increase since 2009. The essential argument of those less positive about attending college seem to focus on the costs of attendance and the limited job opportunities that follow.

Clearly, graduating from college is being perceived more equivocally as an investment in one’s future than it was just a few years ago. Yet, perceptions are really only beliefs, and they can be based on hard evidence and experience, or simple supposition and innuendo. As a youth and her family thinking about how to plan for a future that is indeterminate, how should they go about thinking about whether college is a worthy goal, given the preparation and associated expense it requires?

While many have promoted the significant lifetime earnings differential for college graduation vs having only an associate’s degree or high school diploma, no one really knows what the future portends. As investment vendors are required to state past performance does not necessarily predict future results, the same may be true with regard to the current and future investments that one makes in a college education.

Given that no one really knows what the future holds, there are those who attempt to make predictions based on the best current data available. One very good assessment of whether college is a wise investment comes from an analysis by Abel and Deitz for The Federal Reserve Bank of New York.[2] Using four decades of data they concluded that the return for earning a degree is worth 15 percent, surpassing an average return of 7 percent for investing in stocks or 3 percent investing in bonds. The chart below, taken from their analysis, shows average yearly earnings, in 2013 dollars, of persons with a high school diploma or GED ($41,000), an associates’ degree ($50,000) or a bachelor’s degree ($64,500). The authors concluded: over the past four decades, those with a bachelor’s degree have tended to earn 56 percent more than high school graduates while those with an associate’s degree have tended to earn 21 percent more than high school graduates. Taken over a lifetime (retiring at age 65), and including time not working during being in school, those holding an associates’ degree earn about $325,000 more than those with a high school diploma, while those earning a bachelor’s degree earn more than $1 million more!

Abel and Deitz also acknowledge that to reap such rewards students and their families must pay certain costs such as tuition and room and board. As well, there are what is known as opportunity costs to attending college, which typically means wages not earned while in school. Overall, they estimated the total cost of an associate’s degree in 2013 was $43,700, and for a bachelor’s degree $122,000. Putting everything together, their analysis found that the average investment return after paying tuition and factoring in opportunity costs for an associate’s degree was in the range of 13-15 percent, while that for a bachelor’s degree was 14-15 percent.

As with such aggregate data one might ask about the within group variability that ultimately produces an average. In this case, does one’s major in college impact the return on investment. As seen in the following chart the answer is clearly, yes. Those majoring in fields such as engineering, math/computers, health, and business have a higher rate of return, while those majoring in liberal arts, agriculture, leisure and hospitality, and education have a lower rate of return on the money and time invested. As well, the second column of the chart computes investment returns for those individuals who find themselves underemployed in this array of fields. Returns here are lower, but follow a similar pattern.



Consequently, from this analysis, and many others like it, contrary to perceptions held by those questioning the value of pursing a college degree, the economic returns are excellent. In most cases, such an investment is double what one would earn by investing in stocks and bonds. This is the case despite the costs of attendance, and the loss of income during the years of being in school.

While such a conclusion comes from four decades of data, it is also worth considering a number of caveats:

·      As previously stated, past performance does not necessarily predict future results. With the advent of an array of new ways to acquire the knowledge and skills demanded by employers, conventional and costly post-secondary education may be waning. Online learning, with associated certifications through such organizations as Coursera or EdX, may provide alternatives to traditional two and four-year college programs. These organizations offer courses taught by the world’s most prominent colleges and universities at a fraction of the cost, and validate that a student has fulfilled stated requirements for mastering materials and acquiring skills.
·      Another caveat is that the connection between college attendance and future income is only correlational, and does not necessarily show that such attendance is causal in promoting lifetime earnings.  It may be that individuals who attend college have certain characteristics that also make them abler to find higher paying jobs, and that college attendance is not a necessary or sufficient condition for their success. Indeed, besides such variables as I.Q. or high school GPA, sex, race, social relationships, family income, and health are connected to college attendance, and future employment. Consequently, it may be the case that youth having certain capacities and demographic characteristics may do well regardless of having attended college.
·      The economic justification for going to college appears well founded, but schools and out of school time programs that pressure all youth to follow this path, without recognizing their capacity for doing so is counterproductive. Even if it were possible to control social and economic variables which are inversely related to college attendance, a youth may not have the interest or intellect for pursuing higher learning. Data show that 30-40% of youth who attend a 2 year or four-year college never complete their degrees, and find themselves in debt, and with little or no advantage for having pursued post-secondary school education. For such youth, rather than being encouraged to attend college, a better course may be to counsel them to pursue an occupation that does not require a degree. A subsequent post will examine the Bureau of Labor Statistics’ Occupational Outlook Handbook which lists occupations that are projected to expand or contract during the next decade with accompanying educational requirements and salaries.
Finally, while this post focuses on the economic return of attending college, it should also be pointed out that future financial gain is not the sole or, possibly, the most important reason for such attendance. Acquiring new knowledge, values, and relationships can also be non-monetarized outcomes that enhance the quality of one’s life. Appreciation for the arts, culture, literature, technology, the environment, and racial and socio-economic diversity are other things that college attendance can inform.   

[1] http://www.publicagenda.org/pages/public-opinion-higher-education-2016
[2] Abel, Jaison R. And Deitz, Richard. (2014). Do the benefits of college still outweigh the costs? Current Issues in Economics and Finance. Vol. 20, Number 3. Available at: https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci20-3.pdf

No comments:

Post a Comment