I gave my last lecture of the semester on Monday, which means it´s that time of the year again. Graduates throughout the country will soon be walking the stage, in a proud display of their four (or more) years of hard work, grit, and determination. (At least, in my mind.)
Yet the reality is setting in that for the first time in these young peoples´ lives, they are faced with the reality of exiting the education system and starting “real life”. Find a job, move into less spartan digs, and possibly revise your wardrobe (and resume) to something a little more “mature”. And let´s not forget paying off those pesky student loans.
Last year seven in 10 college graduates completed their education with student loan debt. The average amount was $29,400. This is an average, so the actual levels of indebtedness are skewed across the country, as we can see below.
Despite their large public University systems to help lower-income students have access to higher education, the average Californian, New Yorker, Floridian or Illinoisan had the highest debt in the country – over $25,000 per student. Some States, such as Wyoming, the Dakotas and Oklahoma, seemed to graduate students with relatively low debt levels, if your definition of “low” is less than $20,000.
With all this discussion of debt comes the related question of whether college is a good deal for the average student. Another way to phrase the question is: “is college expensive.”
To the economist, questions of price are always relative. Whether something costs a lot or little is determined by what the alternatives are, or more to the point, what the foregone opportunity cost is. Whether a college education is “expensive” is determined by what the alternative option would be for the average student.
The opportunity cost for a student spending four years in college includes the obvious tuition expense, but it also means four years out of the work force. Taken together the total cost for a four-year degree could be nearly $300,000 – not exactly chump change. Since someone who graduates high school does not incur this opportunity cost, one could say they are $300,000 ahead of a college graduate after these four years. Seems like a no-brainer, right?
Well, it could be if you based your decision to attend college solely on the preceding paragraph. But the decision to not pursue a college degree and enter the workforce directly also comes with a cost. It seems like a good deal at first, but for most it means fewer opportunities, less promotions down the line, limited access to higher paying jobs, and ultimately, lower life-time earnings.
Luckily two economists at the Federal Reserve recently answered the question of how much the average high-school graduate will forgo by eschewing a University education. This figure depends on how many years after graduation we are looking at (University degrees are often prerequisites for career advancement), and also what type of degree the student earned.
It turns out the average college graduate today can expect to earn an additional $800,000 over their career compared to their high-school educated friends. Not bad I´d say. The average annual earnings premium is around $20,300 per year. Obviously not too many recent graduates are making $20,000 more than their non-degree coworkers, but the salary spread widens as these workers age.
To get a feel for how the salary advantage of a University degree evolves over time, consider the figure below.
This figure graphs out the salary advantage of a degree over a high-school diploma against the number of years since graduation. It also shows this advantage for three different cohorts. For those readers graduating soon, your parents are likely included in the red cohort, attending college in the 1970s or 80s. It´s even possible that your grandparents, if they went to college at all, are included in the blue-lined cohort who attended University during the 1950s or 60s.
The salary advantages of higher education take a few years to kick in, but when they do they are pronounced. Not only that, they are even larger than they were for previous generations. Of course, this might suggest that University educated people are earning higher wages, or that their high-school educated counterparts are earning less. (I suspect that the truth involves both of these affects.)
Now, despite this salary advantage of going to college and earning a degree, there is the thorny issue that a college degree doesn´t necessarily secure that dream job that it once did. This “might” be true, but it is the wrong question. High school diplomas don´t exactly guarantee you the middle-class job that they once did. One just needs to consider that the unemployment rate increases as the level of education decreases, as we can see below. If you think it´s hard to find a job when you have a degree, consider what it is like for those who lack this piece of paper. The unemployment rate for those with only a high school education is over two times higher than that for University graduates, and over three times higher for those that haven´t completed high school.
University education might not guarantee that great job it once did, but neither do the other options. What matters is the spread between what a University graduate earns over his high-school educated counterpart. This figure has declined over the past 20 years, but not by much, as we can see below in a figure showing the University earnings premium over high-school education.
It appears that college degrees still pay off for graduates, and even if you don´t make it through the grueling four years you can still expect to have some payoff compared to a high school graduate.
The cost of college might seem high, but you can only get a real feel for how high when you compare it to the other options. While it´s convenient to talk about the Bill Gates, Steve Jobs or Mark Zuckerbergs of the world, for the average student the cost of not completing University is high. It may seem onerous to pay back student loans, but the alternative is monetarily far worse.