Higher education has a public-relations problem. Family incomes are stagnant, but tuition keeps going up. Many students who begin college don't graduate. Even among those who do, students who borrow are finishing with greater and greater average debt burdens. And then they're walking into a tough job market. So what is a college degree really worth?
On Tuesday, the College Board released its latest installment of "Education Pays," a report that showcases the financial and nonfinancial payoffs of earning that degree. In the introduction, the report's authors make clear that they know the fray they're stepping into: "Too often, colorful anecdotes about individuals who have had unfortunate experiences capture the spotlight and lead to inaccurate generalizations about the dangers of making this major life investment," they write.
Despite that mission, Sandy Baum, an independent analyst for the College Board and one of the report's authors, says that "Education Pays" is about data, not advocacy. "This report per se is presenting evidence," says Ms. Baum, who also writes for The Chronicle on its Innovations blog. "We're not telling anyone to do anything."
Here's the good news: the more education you have, the more money you make--on average. The College Board's latest report reaffirms this again. It is not news. These general data were well known and understood by all ten years ago when I was studying higher education in graduate ed school, and for a long time before that. What is different is how controversial the reports are now, how much the value of higher education is called into question because of the continuing annual increases in the cost of higher education, and the financial strain created by the Great Recession on so many families and students. But first, from the same article, the latest College Board data on the relative earnings strength of different levels of education, particularly higher education:
Earnings ratio relative to high school graduates
Earnings ratio relative to high school graduates
- Not a high school grad 0.71
- High school graduate 1.00
- Some college, no degree 1.13
- Associate degree 1.24
- Bachelor's degree 1.66
- Masters degree 1.97
- Doctoral degree 2.58
- Professional degree 2.74
Of course, in real-life individual cases, it matters how able you are--how smart you are, how well you perform, where you went to school, what you studied, professional training and certifications, your confidence and industry. In individual cases, it depends on a lot of things. Some will make much more than the averages, some less. That said, it is still clear that, in general, the more education you have, the more likely you are to ascend ladders of success and earn more income. No surprises in all that.
How does this translate to real dollars? Because of misinterpretation or misuse of the information, this year the College Board did not attempt to estimate the total earnings a college or graduate degree would add to that of a high school diploma over the course of a career. But in 2007, the report estimated that number to be $800K for college grads and $1 million for those with advanced degrees. Of course, the "present value" of those earning today is a lot less; they estimated $450K in the case of the college graduate and $570K in the case of the advanced degree holder.
Now this present-value adjustment is of more than passing interest when you consider that, for those who can afford it, the cost of higher education is paid in today's dollars. But for large and increasing numbers of students, those costs are first met with loans that will be repaid by them or their parents over a period of years, usually about ten years--plus interest. So, for the borrower-students, too, those present-value estimates are much closer to the true added value of income they will receive than the larger nominal amounts.
Still, it may seem easy to conclude that $450K in additional earnings justifies the cost of a college education. But that college education can cost very different amounts depending whether you attend a state college, a state university, or a private university. Important also is the timing of when you earn that money--that is, how much will you earn in the earlier years of your career when you will be repaying those education loans. Since most families and students must finance college with ever-increasing amounts of education loans, the timing of that new job and the starting income compared with the required debt service in the early years can make a pauper of the new graduate. And if you drop out of college, cannot find an appropriate job on graduation, or must accept a lesser paying job, the burden of that education debt becomes oppressive, indeed--or just unworkable. And it could be ten years or more before that financial burden is lifted.
Let's look at the cost of attending various types of colleges today:
- Selective private universities & liberal arts colleges: tuition: approx. $39K / room, board: $13K.
- State flagship university (e.g., University of Rhode Island): tuition: $10K, out-of-state, $27K / room, board: $11K.*
- State college (e.g., Rhode Island College): tuition: $7K, out-of-state, $17K / room, board: $9500.*
- State community college (e.g., Community College of R.I.): tuition: $3650, out-of-state, $9800 / room, board: NA.*
An article at msnbc.com presents Boston University economics professor Laurence Kotlikoff's example of the relative cost and payback for an accountant based on whether he attended a selective private university or a state university. From the msnbc.com article:
Perhaps the greatest lesson of the Great Recession isn't that you shouldn't go to college, but that you should approach it like you would any other investment: with caution.
"It's a very risky investment," said Laurence Kotlikoff, an economics professor at Boston University and president of Economic Security Planning Inc., which makes financial planning software. Calculations done by Kotlikoff for msnbc.com suggest that attending a public college might make more financial sense than a private college. Private schools charge $26,300 a year on average, compared with $7,000 for in-state students at public, four-year schools, according to the College Board.
Using his company's website, ESPlanner.com, Kotlikoff calculated how much discretionary income a student would have after graduation, assuming he or she took out loans to fund an education at University of Massachusetts at Amherst, a public school, or private New York University. The calculation assumed the student earned a business degree, got a job making $65,900 (the median industry salary, according to the BLS) and paid 8 percent interest on the loans.
After factoring in everything from taxes to 401(k) contributions, Kotlikoff calculated the graduate paying off the debt from UMass would have $36,515 for discretionary spending. That would remain stable even after his debt was paid off. The NYU graduate would never catch up. He or she would have $22,128 for discretionary spending at age 22, rising to $35,311 at age 42, when the debt is paid off.
Of course, there are factors that could make the higher debt more worthwhile. Perhaps the NYU graduate would find that degree translated into a higher salary over time, making the extra tuition pay off. But even at the most elite private universities, there are no such guarantees.
---"Is it worth it to go to college? Daunting debt makes some wary of higher education," by Allison Linn, msnbc.com (8.9.10)
Not only are there no such guarantees, but recently reported research indicates that the choice between a highly selective school and a state school appears to make but little difference to one's future success. The reported research I'm talking about found that kids with the same SAT scores and high school performance who go to the most prominent schools they can get into--including the Ivies and other elite schools--have, on average, no more long-term career and financial success than those who attend less prestigious, less expensive schools, including state colleges. That is, a similar level of ability and industry, combined with a competent college education and degree--whether at an Ivy or a public college--usually yields a similar level of success.
In addition to popular lore, don't we already understand that instinctively, empirically? Of course, there's always the cache and appeal that attaches to brand-name schools--and they may make a difference in opening those first doors. But are they worth subverting one's financial future when, in the end, ability and industry will more likely open the doors to your long-term future? For most middle-class and less well-off families and students, it is not.
In addition to popular lore, don't we already understand that instinctively, empirically? Of course, there's always the cache and appeal that attaches to brand-name schools--and they may make a difference in opening those first doors. But are they worth subverting one's financial future when, in the end, ability and industry will more likely open the doors to your long-term future? For most middle-class and less well-off families and students, it is not.
And most recent graduates do not find jobs paying $66K per year, not as starting salaries. Top CPA firm accountants or engineers, perhaps, but not most liberal arts, education and public service graduates. For them, the required levels of education debt to attend private universities are often just not workable.
Given all we've presented, you will understand my recommendation to families and children for whom financing higher education is a major financial burden. First, if there is any workable way for the student to attend college and get that bachelor's degree, do it. But, the options and decisions should be approached with caution. Unless there is an academic or athletic scholarship to be had at that private university, they should choose the home state university or college--and apply for every scholarship grant available, both at the school and in the community. If necessary, commute from home.
The best value? Spend the first two years commuting to a state community college, then transfer to a state college or university ($3600 for two years, then $7000-10,000 for the last two years). It is not the most glamorous option for higher education, but in most cases, this will assure the fastest return and the maximum return from one's higher education investment. And the related loan payments will be much less likely to impoverish the new grad.
But here's another exacerbating problem: most all states have been backing away from their higher levels of financial support for their state schools of higher education. This has been happening in slow increments for some years. But just since 2006-07, Rhode Island's contribution to higher education has decreased by 23%. And now, the dire budgetary situation authored by the Great Recession has the state budget office asking for another 15%.* In the short term, this can only mean further increases in state university tuition. In time, it will contribute to setting the table for restructuring all higher education. It has to come soon, for both private and state institutions.**
State-supported higher education has been the foundation of America's economic success, and the springboard of the American dream. It is at the heart of our national strength and international prominence. It has long provided and inspired a better informed and contributing citizenry in civic and political affairs, and a quality of life that is the envy of the world.
A sense of both concern and sadness necessarily attends an understanding of what the weakening of public financial support for higher education portends for public access and financial affordability for most American families and students, and for the foundational strengths of our country. But in the end, our hope lies in rethinking the definition, structure and delivery of high education in the U.S.**
* As reported in the Providence Journal (9.30.10)
**For further thoughts on the need for higher education reform, see the "Education" section of my recent post, "On Public Goods: Providing Education & Healthcare."
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