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A College Degree Is Not a Smart Investment for Everyone
How Valuable Is a College Degree?. 2016. Lexile Measure: 1270L.
COPYRIGHT 2016 Greenhaven Press, a part of Gale, Cengage Learning
Stephanie Owen and Isabel Sawhill, “Should Everyone Go to College?” Center on Children and Families at Brookings Institution, CCF Brief, no.
50, May 2013, pp. 1-8. Brookings.edu. Copyright © 2013 The Brookings Institution. All rights reserved. Reproduced by permission.
Stephanie Owen is a senior research assistant and Isabel Sawhill is codirector of the Center on Children and Families at the Brookings Institution.
Although some students experience an earnings premium from obtaining a college degree, this benefit depends on a number of factors,
such as school selection, financial aid, field of study, career choice, and completion of the degree. Improvements should be made to
ensure that college is a smart investment for all students.
One way to estimate the value of education is to look at the increase in earnings associated with an additional year of schooling. However,
correlation is not causation, and getting at the true causal effect of education on earnings is not so easy. The main problem is one of selection: if the
smartest, most motivated people are both more likely to go to college and more likely to be financially successful, then the observed difference in
earnings by years of education doesn’t measure the true effect of college.
Measuring the Earnings Premium
Researchers have attempted to get around this problem of causality by employing a number of clever techniques, including, for example,
comparing identical twins with different levels of education. The best studies suggest that the return to an additional year of school is around 10
percent. If we apply this 10 percent rate to the median earnings of about $30,000 for a 25- to 34-year-old high school graduate working full time in
2010, this implies that a year of college increases earnings by $3,000, and four years increases them by $12,000. Notice that this amount is less
than the raw differences in earnings between high school graduates and bachelor’s degree holders of $15,000, but it is in the same ballpark.
Similarly, the raw difference between high school graduates and associate’s degree holders is about $7,000, but a return of 10% would predict the
causal effect of those additional two years to be $6,000.
There are other factors to consider. The cost of college matters as well: the more someone has to pay to attend, the lower the net benefit of
attending. Furthermore, we have to factor in the opportunity cost of college, measured as the foregone earnings a student gives up when he or she
leaves or delays entering the workforce in order to attend school. Using average earnings for 18- and 19-year-olds and 20- and 21-year-olds with
high school degrees (including those working part-time or not at all), Michael Greenstone and Adam Looney of Brookings’ Hamilton Project
calculate an opportunity cost of $54,000 for a four-year degree.
A 17- or 18-year-old deciding whether and where to go to college should carefully consider his or her own likely path of education
and career before committing a considerable amount of time and money to that degree.
In this brief, we take a rather narrow view of the value of a college degree, focusing on the earnings premium. However, there are many nonmonetary benefits of schooling which are harder to measure but no less important. Research suggests that additional education improves overall
wellbeing by affecting things like job satisfaction, health, marriage, parenting, trust, and social interaction. Additionally, there are social benefits to
education, such as reduced crime rates and higher political participation. We also do not want to dismiss personal preferences, and we
acknowledge that many people derive value from their careers in ways that have nothing to do with money. While beyond the scope of this piece,
we do want to point out that these noneconomic factors can change the cost-benefit calculus.
As noted above, the gap in annual earnings between young high school graduates and bachelor’s degree holders working full time is $15,000.
What’s more, the earnings premium associated with a college degree grows over a lifetime. Hamilton Project research shows that 23- to 25-yearolds with bachelor’s degrees make $12,000 more than high school graduates but by age 50, the gap has grown to $46,500. When we look at
lifetime earnings—the sum of earnings over a career—the total premium is $570,000 for a bachelor’s degree and $170,000 for an associate’s
degree. Compared to the average up-front cost of four years of college (tuition plus opportunity cost) of $102,000, the Hamilton Project is not
alone in arguing that investing in college provides “a tremendous return.”
It is always possible to quibble over specific calculations, but it is hard to deny that, on average, the benefits of a college degree far outweigh the
costs. The key phrase here is “on average.” The purpose of this brief is to highlight the reasons why, for a given individual, the benefits may not
outweigh the costs. We emphasize that a 17- or 18-year-old deciding whether and where to go to college should carefully consider his or her own
likely path of education and career before committing a considerable amount of time and money to that degree. With tuitions rising faster than
family incomes, the typical college student is now more dependent than in the past on loans, creating serious risks for the individual student and
perhaps for the system as a whole, should widespread defaults occur in the future. Federal student loans now total close to $1 trillion, larger than
credit card debt or auto loans and second only to mortgage debt on household balance sheets.
Variation in the Return to Education
It is easy to imagine hundreds of dimensions on which college degrees and their payoffs could differ. Ideally, we’d like to be able to look into a
crystal ball and know which individual school will give the highest net benefit for a given student with her unique strengths, weaknesses, and
interests. Of course, we are not able to do this. What we can do is lay out several key dimensions that seem to significantly affect the return to a
college degree. These include school type, school selectivity level, school cost and financial aid, college major, later occupation, and perhaps most
importantly, the probability of completing a degree.
Mark Schneider of the American Enterprise Institute (AEI) and the American Institutes for Research (AIR) used longitudinal data from the
Baccalaureate and Beyond survey to calculate lifetime earnings for bachelor’s earners by type of institution attended, then compared them to the
lifetime earnings of high school graduates. The difference (after accounting for tuition costs and discounting to a present value) is the value of a
bachelor’s degree. For every type of school (categorized by whether the school was a public institution or a nonprofit private institution and by its
selectivity) this value is positive, but it varies widely. People who attended the most selective private schools have a lifetime earnings premium of
over $620,000 (in 2012 dollars). For those who attended a minimally selective or open admission private school, the premium is only a third of
that. Schneider performed a similar exercise with campus-level data on college graduates (compiled by the online salary information company
PayScale), calculating the return on investment (ROI) of a bachelor’s degree. These calculations suggest that public schools tend to have higher
ROIs than private schools, and more selective schools offer higher returns than less selective ones. Even within a school type and selectivity
category, the variation is striking. 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.
The lifetime earnings of an education or arts major working in the service sector are actually lower than the average lifetime earnings
of a high school graduate.
Another important element in estimating the ROI on a college education is financial aid, which can change the expected return dramatically. For
example, Vassar College is one of the most expensive schools on the 2012 list and has a relatively low annual ROI of 6%. But when you factor in
its generous aid packages (nearly 60% of students receive aid, and the average amount is over $30,000), Vassar’s annual ROI increases 50%, to a
return of 9%.
One of the most important takeaways from the PayScale data is that not every bachelor’s degree is a smart investment. After attempting to account
for in-state vs. out-of-state tuition, financial aid, graduation rates, years taken to graduate, wage inflation, and selection, nearly two hundred
schools on the 2012 list have negative ROIs. Students may want to think twice about attending the Savannah College of Art and Design in Georgia
or Jackson State University in Mississippi. The problem is compounded if the students most likely to attend these less selective schools come from
Variation by Field of Study and Career
Even within a school, the choices a student makes about his or her field of study and later career can have a large impact on what he or she gets out
of her degree. It is no coincidence that the three schools with the highest 30-year ROIs on the 2012 PayScale list—Harvey Mudd [College],
Caltech [California Institute of Technology], and MIT [Massachusetts Institute of Technology]—specialize in the STEM fields: science,
technology, engineering, and math. Recent analysis by the Census Bureau also shows that the lifetime earnings of workers with bachelor’s degrees
vary widely by college major and occupation. The highest paid major is engineering, followed by computers and math. The lowest paid major,
with barely half the lifetime earnings of engineering majors, is education, followed by the arts and psychology. The highest-earning occupation
category is architecture and engineering, with computers, math, and management in second place. The lowest-earning occupation for college
graduates is service. According to Census’s calculations, the lifetime earnings of an education or arts major working in the service sector are
actually lower than the average lifetime earnings of a high school graduate.
When we dig even deeper, we see that just as not all college degrees are equal, neither are all high school diplomas. Anthony Carnevale and his
colleagues at the Georgetown Center on Education and the Workforce use similar methodology to the Census calculations but disaggregate even
further, estimating median lifetime earnings for all education levels by occupation. They find that 14 percent of people with a high school diploma
make at least as much as those with a bachelor’s degree, and 17 percent of people with a bachelor’s degree make more than those with a
professional degree. The authors argue that much of this finding is explained by occupation. In every occupation category, more educated workers
But, for example, someone working in a STEM job with only a high school diploma can expect to make more over a lifetime than someone with a
bachelor’s degree working in education, community service and arts, sales and office work, health support, blue collar jobs, or personal services….
In fact, choice of major can also affect whether a college graduate can find a job at all. Another recent report from the Georgetown Center on
Education and the Workforce breaks down unemployment rates by major for both recent (age 22-26) and experienced (age 30-54) college
graduates in 2009-2010. People who majored in education or health have very low unemployment—even though education is one of the lowestpaying majors. Architecture graduates have particularly high unemployment, which may simply reflect the decline of the construction industry
during the Great Recession. Arts majors don’t fare too well, either. The expected earnings (median full-time earnings times the probability of being
employed) of a young college graduate with a theater degree are about $6,000 more than the expected earnings of a young high school graduate.
For a young person with a mechanical engineering degree, the expected earnings of the college graduate is a staggering $35,000 more than that of
a typical high school graduate.
Variation in Graduation Rates
Comparisons of the return to college by highest degree attained include only people who actually complete college. Students who fail to obtain a
degree incur some or all of the costs of a bachelor’s degree without the ultimate payoff. This has major implications for inequalities of income and
wealth, as the students least likely to graduate—lower-income students—are also the most likely to take on debt to finance their education.
It is a mistake to unilaterally tell young Americans that going to college—any college—is the best decision they can make.
Fewer than 60 percent of students who enter four-year schools finish within six years, and for low-income students it’s even worse. Again, the
variation in this measure is huge. Just within Washington, D.C., for example, six-year graduation rates range from a near-universal 93 percent at
Georgetown University to a dismal 19 percent at the University of D.C. Of course, these are very different institutions, and we might expect highachieving students at an elite school like Georgetown to have higher completion rates than at a less competitive school like UDC. In fact, Frederick
Hess and his colleagues at AEI [American Enterprise Institute] have documented that the relationship between selectivity and completion is
positive, echoing other work that suggests that students are more likely to succeed in and graduate from college when they attend more selective
schools. At the most selective schools, 88 percent of students graduate within six years; at non-competitive schools, only 35 percent do.
Furthermore, the range of completion rates is negatively correlated with school ranking, meaning the least selective schools have the widest range.
For example, one non-competitive school, Arkansas Baptist College, graduates 100 percent of its students, while only 8 percent of students at
Southern University at New Orleans finish. Not every student can get into Harvard, where the likelihood of graduating is 97 percent, but students
can choose to attend a school with a better track record within their ability level.
Unfortunately, recent evidence by Caroline Hoxby of Stanford and Christopher Avery of Harvard shows that most high-achieving low-income
students never even apply to the selective schools that they are qualified to attend—and at which they would be eligible for generous financial aid.
There is clearly room for policies that do a better job of matching students to schools.
The Need for Information
All of this suggests that it is a mistake to unilaterally tell young Americans that going to college—any college—is the best decision they can
make. If they choose wisely and attend a school with generous financial aid and high expected earnings, and if they don’t just enroll but graduate,
they can greatly improve their lifetime prospects. The information needed to make a wise decision, however, can be difficult to find and hard to
One solution is simply to make the type of information discussed above more readily available. A study by Andrew Kelly and Mark Schneider of
AEI found that when parents were asked to choose between two similar public universities in their state, giving them information on the schools’
graduation rates caused them to prefer the higher-performing school.
The PayScale college rankings are a step in the right direction, giving potential students and their parents information with which to make better
decisions. Similarly, the [Barack] Obama Administration’s new College Scorecard is being developed to increase transparency in the college
application process. As it operates now, a prospective student can type in a college’s name and learn its average net price, graduation rate, loan
default rate, and median borrowed amount. The Department of Education is working to add information about the earnings of a given school’s
graduates. There is also a multi-dimensional search feature that allows users to find schools by location, size, and degrees and majors offered. The
Student Right to Know Before You Go Act, sponsored by Senators Ron Wyden (D-OR) and Marco Rubio (R-FL), also aims to expand the data
available on the costs and benefits of individual schools, as well as programs and majors within schools.
Research suggests that grants and loans increase enrollment but that aid must be tied to performance in order to affect persistence.
The College Scorecard is an admirable effort to help students and parents navigate the complicated process of choosing a college. However, it may
not go far enough in improving transparency and helping students make the best possible decisions. A recent report by the Center for American
Progress (CAP) showed a draft of the Scorecard to a focus group of college-bound high school students and found, among other things, that they
are frequently confused about the term “net price” and give little weight to six-year graduation rates because they expect to graduate in four. It
appears that the White House has responded to some of these critiques, for example showing median amount borrowed and default rates rather
than the confusing “student loan repayment.” Nevertheless, more information for students and their parents is needed.
The Need for Improvements
There is also room for improvement in the financial aid system, which can seem overwhelmingly complex for families not familiar with the
process. Studies have shown that students frequently underestimate how much aid they are eligible for, and don’t claim the tax incentives that
would save them money. Since 2009, the Administration has worked to simplify the FAFSA [Free Application for Federal Student Aid], the form
that families must fill out to receive federal aid—but more could be done to guide low-income families through the process.
In the longer run, colleges need to do more to ensure that their students graduate, particularly the lower-income students who struggle most with
persistence and completion. Research suggests that grants and loans increase enrollment but that aid must be tied to performance in order to affect
persistence. Currently, we spend over $100 billion on Pell Grants and federal loans, despite a complete lack of evidence that this money leads to
higher graduation rates. Good research on programs like Georgia …
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