The unknown college payoff

The college premium — the average difference in lifetime earnings of college graduates compared to high-school graduates — is a lot less than previous estimates, reports the Wall Street Journal. Often quoted at $1 million or $800,000 it’s more like $279,893, estimates Mark Schneider, a vice president of the American Institutes for Research, a nonprofit research organization. Even graduates of elite institutions don’t earn a $1 million premium, Schneider says.

(Estimates) don’t take into account deductions from income taxes or breaks in employment. Nor do they factor in debt, particularly student debt loads, which have ballooned for both public and private colleges in recent years.

The premium number is meaningless unless it’s broken down by field of study and student characteristics, responds Andrew J. Coulson at Cato @ Liberty.

What’s the premium difference, for instance, between workers who majored in engineering, chemistry, computer science, mathematics, economics, etc., compared to those who majored in communications, art history, social work, multicultural studies, etc.? A similar breakdown of interest would be by SAT score.

College costs have been growing faster than inflation year after year; salaries aren’t growing that fast in most careers. At some point, the premium for C+ students and “fuzzy studies” majors will reach zero.

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Comments

  1. I’ve actually been concluding the same thing for quite some time, but this is the first time I’ve seen others start to conclude the same thing.

    I think it’s extremely prudent not to take on too much debt.

  2. $279,893

    A great example of spurious precision. “About $280,000” would have been far more credible. Asserting six significant figures for an estimate baed on so many uncertainties and assumptions discredits the analyst.

  3. Cranberry says:

    “At some point, the premium for C+ students and “fuzzy studies” majors will reach zero.”

    I’m not certain I’d assume that. I’d have to see the breakdown in career choices. A C+ student who’s dyslexic, but a brilliant entrepreneur, could go on to make more the first year after his business takes off than his A+ classmate who chose to become an archaeologist will make in her working years.

    Everyone seems to assume that it’s a good thing to become an engineer. As a profession, though, they don’t make that much more, and a vulnerable to layoffs. If you regard the internet bubble as an exception, the earnings outlook for an A+ engineer isn’t super duper.

    A college degree increases the chance you will get an interview, and it increases the chance you will be seen as smart enough to be worth employing. I don’t know if anyone cares about your grade average in college, once you’re an established professional. It matters for admissions to graduate and professional schools, but graduate degrees don’t necessarily increase one’s income.

    $280,000, curiously enough, sort of works out to the tuition one might expect to pay for two children, once a couple pays off their own tuition debt. Thus, college degree holders have the means to keep their children in the class of the “college educated.”

  4. Your post reminded me of some similar (perhaps tangential) thoughts I read about here:

    http://www.thesimpledollar.com/2009/11/21/its-not-the-school-its-the-student/

  5. “A C+ student who’s dyslexic, but a brilliant entrepreneur, could go on to make more the first year after his business takes off than his A+ classmate who chose to become an archaeologist will make in her working years”…true, but in this context, the question is whether the C+ student *with a college degree* would have a better chance of making his business success than another individual with the same attributes but without a college degree.

  6. Cranberry says:

    Yes, he would have a better chance. College also helps people build a network of contacts and acquaintances. Making it through college–even with a C+–is useful.

    American parents aren’t stupid, although so frequently articles about college tuition make it seem that they are. Many of the reasons they send their children to college aren’t academic. Gaining or maintaining membership in the “college educated” class has its own value. Think of all the personals (back in the day) which insist upon “professional swf,” etc.

    A more important point is, why does anyone allow their child to become an archeologist, if that child will face large college loans to pay back? (or musician, or social worker,…) No matter how high the grade point average may be, there are some professions which are guaranteed not to pay enough to repay college loans before retirement.

  7. A more important point is, why does anyone allow their child to become an archeologist, if that child will face large college loans to pay back? (or musician, or social worker,…) No matter how high the grade point average may be, there are some professions which are guaranteed not to pay enough to repay college loans before retirement.

    College students are legally adults. “Allowing” would indicate the student isn’t going to be a success in any field, because the child is too immature to succeed and the parents too controlling and certain of their own views to raise a successful child.

  8. Richard Aubrey says:

    So, stash the cost of an education in a CD and see what it’s worth in forty years.
    Just for grins, let’s presume 5% and $50,000 for four years’ college, not including income not earned those four years.
    Somewhat shy of $400,000.
    So your education premium needs to be worth $400,000 by retirement to break even.
    Frequently that is the case when you think of a job requiring BA/BS and providing a substantial pension. Currently, even teachers’ pensions are taking incremental hits.
    In Michigan, if you get out now, your pension will be calculated with your years of service as part of the formula. If you wait until next year, the max years of service will be thirty, instead of what you’ve actually accumulated, which could be thirty-five or more.
    Reality is sniffing around the edges of fat retirement programs. Which is to say that this particular premium for education could be dropping.

  9. Mr. Aubrey, you are presuming full employment.

    From another blog, I just saw this: “There Isn’t Any Unemployment Disaster For The College-Educated.” (http://www.businessinsider.com/reminder-if-you-want-a-job-get-educated-2010-2)

    Mike, for all the grandeur reaching 18 confers on a person, most 18 year olds have no income, and no assets. They might have a high school degree. The entire college tuition game depends upon indulgent parental support.

    Taking out large loans to pay for a college degree in a low-paying field is a recipe for life-long poverty. If you prefer, you could replace “allow” with “aid and abet.” Parents have seen more of the world than their children. They have the duty to give their children good advice, and not to support them when they choose an expensive field of study which will leave them in debt and unsuited for the workforce.

    Taking out loans at insane rates of interest to become an actor doesn’t make one a “successful adult.”