NY Fed - Return on Investment for College

[cpwill]

New York Fed out with an interesting, updated set of numbers.

In a two-part blog series, we offer an economic perspective on the value of a college degree, updating our previous research and analysis. This first post examines the costs, benefits, and return for the typical college graduate. We estimate the return to college at 12.5 percent, a rate well above the threshold for a sound investment. Our second post looks beyond the typical graduate and finds a college degree might not be worth it for at least a quarter of college graduates....​

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We follow the methodology used in our previous studies, with one important exception. Rather than using standard regression methods to estimate lifetime earnings profiles for the average graduate, we utilize a quantile regression method to estimate earnings profiles and the rate of return for the median graduate. Because averages can be pulled up by particularly high wage earners, the median provides an estimate more in line with what the “typical” graduate could expect. Indeed, the rates of return we estimate here are generally a bit lower than our previous estimates based on averages. The chart below plots our estimates of the return to college for the median graduate since 1970.​

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...The typical college graduate earns a return that easily surpasses the benchmark for a sound investment. That said, there are a number of caveats to keep in mind with our back-of-the-envelope calculations. First, some of what we estimate as the benefit to college may not be a consequence of the knowledge and skills acquired while in school but rather could reflect innate abilities possessed by those who complete college. However, a number of studies that attempt to correct for this possibility find a similar return. In part, this is likely because in today’s labor market a college degree continues to serve as a gateway to professional occupations that offer better opportunities for wage growth over the life cycle. It is also important to keep in mind that our estimates apply to college graduates; those who start college but do not complete a degree incur at least some of the costs but enjoy far fewer benefits....​

 

[j brown's body]

Keep in mind that going to college also increases the chances you'll marry someone who will bring home a heftier paycheck, contributing more the family budget.

In fact, with women being in the majority at colleges, college is probably a great place for a guy to get... oh, never mind.

 

[cpwill]

But that, of course, assumes you are a median (or better) student who completes a degree within four years. However, only 45% of students manage to finish in 4 years, and over a third don't even manage to finish in 6 years. Furthermore, the above analysis does not take into account the cost of on-campus living and also assumes that the student gets a significant amount of student aid.

What does it mean for the return when you account for those?

While the average student pays about $30,000 out of pocket for four years of college, there are many circumstances under which someone would pay significantly more. We consider some of these circumstances in the chart below. In each case, we consider differences in direct costs only....​

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...... [Additionally] It turns out that taking an extra year or two to finish school adds considerably to the cost, in large part because of higher opportunity costs. As we have shown before, in addition to the direct cost of paying for an extra one or two years of college out-of-pocket, there is an extra cost in the form of wages that one could have earned with a college degree had one graduated in four years. Also, entering the job market a year or two late damages a worker’s lifetime earnings profile. In addition to giving up one or two years of college-level earnings while in school longer, students miss out on a year or two of experience and the extra push that gives their wages over their working life......​

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....While our baseline estimates focus on the median college graduate, by definition, half of graduates are earning a lower return.... College students can choose their majors, and graduates in some majors tend to earn higher wages than others. Below, we show the return to college for twelve major groupings. For each major, we calculate the median college life-cycle wage premium relative to the median high school graduate and hold the average net price constant across majors.​

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[Gatsby]

Yep, it varies a lot depending on major and where you attended school. Majoring in Data Science is going to be more lucrative than majoring in Latinx Studies, even though the degrees cost more-or-less the same.

And in terms of where you go, you'll generally get a better ROI at either an off-brand state university or an elite university. The worst deals are the expensive, non-elite private universities. (Although with the elite schools, it's possible that most of the high earning power comes not from the education, signaling, or connections...but merely from selection bias.)

 

[ataraxia]

Also, there are many non-financial benefits of going to college which are hard to capture in such studies looking solely at ROI. College fosters critical thinking, social/historical/cultural/civic awareness and knowledge, improved health outcomes, and a broader understanding of the world. It also fosters personal growth, develops essential skills, and builds a strong network for career advancemen.

I mean think about if America had more college educated people- it would’ve been less likely to elect Donald Trump twice to the presidency. Think about all the irreparable damage and pain that could been avoided- both in the short and long term. It’s hard to capture that in such a simple study looking only at ROI in personal finances.