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The Limited Returns to Higher Education

From Prudent Bear.

"As higher education costs escalate faster than inflation while the global job market remains largely depressed, increasing numbers of commentators are questioning the value of higher education as a whole. The question becomes more urgent, as state budgets become increasingly burdened by higher education's further expansion. However the answer to the question of education's value seems pretty clear to me: it depends who is getting educated in what."

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"In 1973, college was cheap compared to today, but the differential in average earnings between college graduates and high school graduates was also smaller than today."

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"Looked at in a different way, if we assume the average career in full-time employment lasts for 30 years, so that the differential between college and high school earnings becomes a 30-year annuity (with both college costs and earnings being at 1973 levels, corrected for inflation), then 1973's pretax return on investment for a man from college education becomes 36%, for a woman 26%. Post-tax the returns become 25% and 18%. For the state, the returns on subsidization are 10% for men and 7% for women. All healthy figures, confirming the belief that in 1973, even with the earnings differential between high school and college less than it later became, a college education was on average a pretty good deal. Even allowing for the fact that the average includes many students whose benefits from college education were lower than average, college must have been an adequate or better deal for pretty well all those undertaking it."

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"Now look at 2009. The cost of college in real terms has escalated by a further 29%. However with the lackluster economy of the 2000s followed by a further grinding recession, the earnings premium for college-educated workers has declined, by 9% for men and 5% for women. It still remains around 80% higher than the 1973 earnings premium, for both sexes, but the effect of continued ratcheting up of college costs and the modest decline in the college earnings premium has made college dramatically less attractive on a return-on-investment basis. Instead of the healthy 25% and 18% post-tax returns that had been achieved in 1973, and the higher returns in the intervening years, the post-tax return from college investment has fallen to 21% for men and 18% for women. Because of the huge increase in costs, the college investment is also much riskier in relation to people's earnings and assets than that of 1973. As for the government, the tax return from providing full scholarships has declined into single digits, 8% for men and 5% for women."

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"the average conceals large differences and two countervailing factors. As to the differences, college remains highly financially attractive to those enrolled in the best schools. If you can get into Princeton, you should go there; it costs little more than other private schools and your potential earnings uplift is stunning. Furthermore, your return is better from a scientific or technical degree than from a liberal arts degree. That should not be taken too far; petroleum engineers currently enjoy the best average education premium, but that reflects current buoyant hiring trends in the oil business, which are unlikely to last over an entire career – as a petroleum engineer in the oil price downtrend of 1986-2002 your earnings stagnated and you may well have suffered periods of unemployment. Nevertheless, a degree in biotech today is unquestionably worth more than one in women's studies."

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"...the income benefits outlined above may not in fact be caused by college degrees but simply coincidental with them, because those who go to college are on average smarter than those who don't."

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"For society as a whole therefore, the benefits of college education may be diminishing, though still considerable. Pushing to educate students ever further down the ability spectrum seems likely to have costs exceeding its benefits unless the students are very highly motivated to undergo the college experience. Rather than expanding the U.S. college system it would make more sense to streamline it, closing marginal colleges with a population of indifferent students and cutting back subsidies to programs of low economic value. Likewise, subsidizing low-ability students in for-profit colleges, generally without campuses, generally adds little value."

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"For individual students, college should only be undertaken for those who expect to gain especial benefit from the college experience, either academically or through its other offerings. The initial four-year college should thus be the province of no more than 15-20% of students. Most of the next 60% of the ability group should get higher education in smaller doses, a year or two initially, the rest spread throughout their careers. With this approach, there will be far fewer students wasting four years studying political correctness and binge drinking – but, far more important, many fewer steel workers and auto workers finding themselves made redundant at 50, and unable to transition to a new life phase of renewed productivity."

Posted by Cute at 5:47 PM

Labels: education/career, financial (non-tax)