Higher Education is Still a Very Good Investment-Becker

Posner gives an excellent discussion of the economics of legal education. Although many reforms seem eminently desirable, such as reducing law school programs from three to two years, I am optimistic that the demand for lawyers will pick up again once the American economy returns to long-term growth levels. The US remains a litigious society, and the number of laws and regulations to be litigated are increasing, not decreasing.

Some reputable individuals are claiming that the advantages of a college education more generally are greatly overblown, and that many of the students who now go through 4 years of college are wasting their time, and their own and their parent’s money. Yet an examination of the evidence shows conclusively that for average college graduates, their education is a much better deal even after 4 years of slow growth of the American economy than it was a few decades ago.

Tuition and fees for college education in general, as for law schools, have grown sharply since 1980: more than doubling in real terms for 4-year private colleges and universities, and also for 2-year private colleges, and public colleges and universities. Private schools have greatly increased their scholarships and other financial support over this time period, so the net increase in tuition is somewhat less. But no question the growth in tuition has still been substantial.

However, even at elite private universities and colleges, tuition is only about half the total cost of a college education. The remainder of the costs is the earnings foregone resulting from being in school rather than working after finishing high school. These costs have hardly grown at all since the earnings of high school graduates have been rather flat in real terms. Therefore, the total cost of a college education has grown by about 50% since 1980, still a lot, but much less than the growth in tuition.

Offsetting this increase in costs has been the sizable growth in financial gains from getting at least 4 years of higher education (as well as gains in health, marriage, and other dimensions that I will not discuss). The earnings of the average person with at least this much education have grown during past 30 years from being about 40% higher than those of the average high school graduate to being over 80% higher. This sizable growth in this earnings advantage implies that a 4-year college education has remained a good deal for the average student. Indeed, it has even become a better deal. By that I mean that the average lifetime financial gain from going to a 4-year college program has grown significantly, even after subtracting the increase in net tuition, and that the rate of return on such an education has not decreased over time.

Some critics of higher education have mentioned the growth in the unemployment of men and women with a higher education during the financial crisis and recession. The unemployment rate of persons with a bachelor’s degree or higher has grown, from about 2% in 2008 to just under 4% at the end of 2012. However, its growth has been less than that of persons with lesser education. For example, the unemployment rate of high school graduates grew from 5% in 2008 to over 10% in 2010, and fell back to 8.3% by end of 2012. In fact, the unemployment rate of persons with at least a bachelor’s degree is even now less than were the unemployment rates of persons with lesser education before the crisis struck.

Persons with less than four years of college do not earn much more than high school graduates, and their unemployment rates are only a little lower than that of high school graduates. Therefore, starting but dropping out of college is not a good deal financially. Yet about half of all men and women who start college fail to get a 4-year bachelor degree, and that is a real problem.

Four years of college education remains on the average a very good investment for students who can manage to pay the higher tuition costs that schools now charge, even net of higher scholarships and other grants. The aim of the federally subsidized student loan program is to help students who cannot afford the costs of higher education, but many college graduates do not earn a lot, and have large interest and principal repayments on their student loans. As a result, many of them default on their loans, although the biggest defaulters are those who went to two-year college programs, especially proprietary schools.

This is not the place to go into details about ways to make student loans less onerous for persons who are not earning a lot. One possibility is to make interest rates contingent on earnings, so that higher earners are charged more per dollar of loan than lower earners. This has the risk of mainly attracting individuals who do not expect to be earning a lot, but a well-designed loan program may be able to fix this “adverse selection” problem.

Finding a more efficient student loan program may help increase the number of students who take advantage of the large financial, health,marriage, and other gains from 4 years of college education. Increasing the number of these students should be a major goal of American higher education policy.

Comments

[Wallace Hendricks]

While it was once reasonable to lump all college graduates together to compare them to high school graduates, this is no longer true. The return to different college majors and to different institutions varies widely. Parents know this when they are preparing their children for application to colleges. Last year, for example, a large percentage of the college degrees for people with education majors came from on-line institutions such as Phoenix University. Many colleges now provide little more than material that should have been learned in high school.

This problem mimics the problem of huge differences in the quality of education at the high school level. Until we get a handle on measuring returns other than by years of schooling or graduation, these discussions will have very little importance.

[Eric Rasmusen]

Look at Figure 4, a misleadingly titled table at:
http://deltacostproject.org/resources/pdf/trends_in_spending-report.pdf

At private universities, tuition has risen less than other income sources. Maybe that's true of public research universities too, but it's hard to tell from eyeballing the diagram.

This turns the tuition issue on its head. Students are getting an increasingly greater subsidy from endowments, med schools, etc. over time. Their tuition is rising, but the cost of what the university is providing them is rising even more. Or, since accounting is tricky, it might be that the subsidy students are providing the rest of the university has been falling. Either way, if we assume that colleges are getting what they pay for, college is an increasingly good deal.

This makes sense if you think about it. Colleges are increasingly competing for students by means of luxury dorms, parking lots, job placement centers, fancy gyms, psychological counsellors, and so forth.

[Christopher Graves]

I don't think the relevant question is whether or not college graduates earn more than those who only make it through high school or less. Rather, the question should be whether attending a college actually develops a person intellectually, culturally, and in their ability to make judgements. As it stands now, a college diploma, especially from one of the elite institutions, is a proxy for these desirable qualities, but it is an open question in my mind whether most colleges provide this sort of training and cultivation. It might just be that these schools merely draw bright people and provide them access to other bright people to interact with along with study materials in the library, which could be had at the local public library or book store at home for a lot less time and money.

I am sure a few colleges do these things, and most do a bit, but I see most colleges as relegating their central mission, viz. teaching, to a side-line element of fluff, if they consider it at all. Instead, obscure, irrelevant research is given top billing. Tuition and state and federal subsidy are predominately directed to supporting research. In a relatively small number of cases, the research might be socially valuable and clearly presented, but should students' education be compromised to encourage research? I do not think so. If one is a researcher rather than a professor (consider what the word literally means), then everyone concerned would be better served if the researcher moved on to a think tank or a primarily research oriented institution such as Bell Laboratories or the Rand Corporation.

Most colleges are defrauding students and their parents by not focusing on the preservation and dissemination of the received body of knowledge built up over the course of the history of Western Civilization along with the cultivation of reasoning skills, insight, taste, and judgement.

[Pointsnfigures]

I disagree Chris. There really is only one tangible way to measure the success/failure of college and that is how you do financially. I agree, you should learn something-and I'd like to see data adjusted for majors, prestige of schools etc. But it' s plain. Go and graduate, do better. In the Recession/Depression, college grads were not unemployed as much as non college grads.

[MykelThomorrow]

As for my own opinion, I can say that being enrolled into a known University will never be the basis of knowledge since some are born with potential and high IQs.