The economics of a college degree

By Felix Salmon
July 12, 2010
BusinessWeek has a big feature on the value of a college degree, and naturally has <a href="http://www.businessweek.com/interactive_reports " data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

BusinessWeek has a big feature on the value of a college degree, and naturally has presented it in the format of a ranking. College rankings are profoundly silly things, and this one is no exception; it purports to calculate the extra amount of money that graduates of certain universities earn, compared to the amount that they would earn if they hadn’t gone to college, thereby coming up with some kind of dollar figure for value-for-money. It then ranks “30-year net return on investment”, which ranges from $1.69 million at MIT to just $998 at Black Hills State University in Spearfish, South Dakota.

There’s a lot to dislike here, and the BW story twists itself into knots listing one disclaimer after another. For one thing, the survey doesn’t look at how much people actually spend on college tuition: it just looks at the headline rack rates, failing to take into account any kind of grants or student aid. It also uses a 30-year-long dataset, which includes a lot of years when women were chronically underpaid. That penalizes women’s colleges.

What’s more, the survey does a very bad job of quantifying the benefits of a liberal-arts degree. Let’s say you go to college and then earn $45,000 a year working in the theater, or you end up with a steady job in public administration or social services. You’re clearly better off in many different ways than a high-school graduate earning the same amount — you’re probably happier in your job, you’re doing what you want, and you have more job security. But the BW methodology would give you a negative return on your university tuition, on the grounds that you missed out on earning money while you were at college.

There are other problems with the survey, too, which aren’t even hinted at in the BW story. Pay for college graduates has been rising over the past 30 years, while pay for individuals with no more than a high-school education has been falling sharply. But the survey pays no attention to those trends, and assumes that the income prospects for someone with no college education are the same now as they have been, on average, over the past 30 years. Needless to say, that’s ridiculous.

The survey also assumes that students who drop out of any given university will make no more money than if they hadn’t enrolled at all. That’s trivially false in the case of top-ranked universities like MIT and Stanford, where you could probably make the case that dropouts end up making more money than graduates.

And the survey also concentrates solely on income, rather than wealth. Getting large paychecks is one — but only one — way to get wealthy. And I’m pretty sure that college graduates in general are wealthier than non-graduates earning the same amount of money. If nothing else, they have a tendency to marry each other, so even if they don’t end up earning a lot of money themselves, they can still benefit from their spouse’s higher income.

Even with all those caveats, one thing jumps out from the survey, which again BW doesn’t mention: even the very worst-performing colleges — the ones coming 851st and 852nd out of 852, for instance, where fewer than one in three students even graduate — have significantly positive “annualized net ROI”s. John Carney looks at these numbers and concludes that “the ROI on going to college is worse than the S&P” — not when the ROI on the S&P is negative, it isn’t. Clearly anybody who’s got a good chance of graduating from university would be much better going to university than investing their tuition money in an S&P 500 index fund.

The one thing which most annoys me about the survey, however, has nothing to do with the methodology, and rather the way that the results are presented: you have to do a lot of clicking and scrolling to try to read them, and they’re not searchable. So while the results carefully make the distinction between public and private colleges, they don’t make the distinction between for-profit and non-profit private colleges. Are there any for-profit colleges in the list? How do they stack up? That’s one datapoint I’d be fascinated to see, but I can’t find it anywhere.

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Comments
14 comments so far

These kinds of metrics are rather silly, one can poke lots of holes in it either way. Two things you have overlooked:

a) Many individuals at the top schools will go on to get additional education so their total expense is higher.
b) Some percentage of the individuals will have to take out loans, so one has to consider the cost of debt payments and the associated spread.

More generally, the point of the “Liberal arts college is too expensive” crowd isn’t that additional education doesn’t lead to higher wages, but rather that it shouldn’t be a requirement for better jobs. Why does one have to bury themselves in 100k of debt for a college degree so they will be hired for “a steady job in public administration or social services?” Why is everyone who is unable to get that 100k loan, destined to spend their entire live working at the drive-thru. I can think of three reasons, but none are socially worthwhile by my accounting.

The first is that the academics at college are the important part. I find that hard to believe. There are jokes about majoring in “underwater basket-weaving” for a reason, and the vast majority of college graduates still can’t do calculus. If academic knowledge is the real reason companies prefer college graduates, then we should spend the money we would spend trying to “send every child to college” hiring college professors to teach at the secondary level.

The second explanation would be that living away from ones parents for four years provides time for individuals to mature into productive workers. If that’s the case then virtually any structured activity outside of the home should be worthwhile. We could dramatically increase the size of programs like Ameri-Corp and the Peace Corp, we could even bring back apprenticeship, all without unduly burdening young adults with debt.

The third explanation would be that it is just a signaling device used by middle and upper-middle class families to perpetuate their middle class status onto their children.

Posted by davidwe | Report as abusive

A nice hard critique!

The biggest flaw of all is that getting into MIT and the rest means you are already scientifically or technically brilliant. I am sure that folks who get into MIT but choose not to attend also make lots of money.

Folks pay these schools tons of money for the secret sauce when in fact the school is busy selecting students that possess the secret sauce. What a racket!

Posted by DanHess | Report as abusive

Quite interesting. Now I’d like to see something that determines excess “30-year ROI” by school over expected earnings for mean SAT (or SAT math, SAT verbal, or a function of SATs plus rank in class). My guess is, from extremely high rank of engineering and science schools like MIT, Caltech, Stanford, and Berkeley, that the most weight in fashioning outcomes goes to the math SAT. What would we conclude if the excess is negligible or negative?

Posted by xyz70 | Report as abusive

I think that they may have also overlooked the fact that only in the last decade that jobs that require degrees are now subject to competition with those in 3rd world countries, which will lead to the value of their degrees to be less than in the past

Posted by willid3 | Report as abusive

Speaking as an Ivy League graduate with too many degrees and a lifetime of experience in education at all levels…

As DanHess says, the students who go to the top schools would be successful anywhere. One study looking at workers five years out of college concluded that students ACCEPTED to top-ranked schools did just as well financially as those who ATTENDED top-ranked schools. Moreover, students who APPLIED top top-ranked schools also did just as well whether or not they were accepted. Within reason, at least, ambition is far more important than the choice of college. The biggest advantage of a top-ranked college is that it improves your chances of getting into a top-ranked PhD program, however that career track is not particularly rewarding financially.

willid3, ALL jobs are now subject to global competition either directly or indirectly. I see no evidence that the value of a useful degree from a good school has been decreased.

davidwe, some degrees explicitly teach you useful skills. Unsurprisingly, those graduates tend to fare the best in the job market. As for the rest, a college degree is nonetheless proof of one’s ability to produce a large quantity of high-quality work while working within a somewhat arbitrary system of rules. It is that self-discipline that (as a group) distinguishes college graduates from those who drop out or do not attend college.

Of course there might be cheaper ways of verifying that an individual possesses those characteristics (as well as the basic literacy that is essential for so many jobs).

Posted by TFF | Report as abusive

There are all sorts of problems with the methodology.

First, they rely solely on self-reported income from graduates. I can think of all sorts of selection effects here that could be skewing the data. Second, they do not include individuals that are not full-time hourly or salaried employees. That means project- and contract-based employees are left out of their sample. What’s more, self-employed graduates are also excluded. Third, this simply looks at former students who only received a bachelor’s degree. Those that went on to earn graduate and professional degrees were excluded. I can understand why they did this–makes it easier to draw a line from school invested in to future earnings–but there is something to be said for the effect of one’s undergraduate degree and their likelihood of being accepted into a solid post-graduate program and the future earnings that result.

I played around with the data and created my own rankings (http://bit.ly/c0vmBz) based on a simplistic composite of the data presented by PayScale. I ended up with Brigham Young as the school providing the best ROI. Bottom line is these types of rankings are tough to get right.

Posted by BillPetti | Report as abusive

The amazing thing to me was that it seemed that BW assumed each student paid full tuition. The deals get better if you have a scholarship or have a work-study program.

Posted by darbsnave | Report as abusive

There are many virtures in your criticism of this survey. This, however, is not one of them:

“Let’s say you go to college and then earn $45,000 a year working in the theater… You’re clearly better off in many different ways than a high-school graduate earning the same amount…”

And that’s as may be, but one of the ways you are emphatically not better off is in terms of the money you’re making. You may well be much worse off–and it’s time to take a hard look at that reality. You can’t really fault an ROI study for measuring what it sets out to measure!

I have two friends, neither with a college degree, who worked their ways up from grocery clerk to store manager. Each of them makes more money than I–college credentialled–do.

Now, of course, money isn’t everything. That person working in theatre may be much happier, and have a “better” life overall, than if she’d gone off to manage a big-box retail store. But you would like to think she was able to make an informed decision about the path of her life, and one thing she’d need to do that is some hard numerical information on what a college education is going to do for her finances. That’s why this study, for all it’s shortcomings, is critically valuable. We need much more of this sort of thing.

Posted by ckbryant | Report as abusive

Re: DanHess
> “Already technically brilliant”
This varies widely by individual and, within an individual, by subject. I came in knowing a fair bit about physics and very little about programming or computer science. i also know people who have come in already being one of the major contributors to open source software projects. I also know people who haven’t done much of anything besides get good grades in school and a few extracurricular activities.

>”The secret sauce is the selectivity”
No, I have in fact learned a great deal here, both in classes and by hanging out with and working on projects with other smart and accomplished people.

- Andrew Farrell
course VI, 2012

Posted by afarrell | Report as abusive

They forget to include credit card debt. If you are studying in a hard program you really do not have much time for a job. If you have one it is minimum wage for 15 hours a week or so. During the four years you are in school you will likely have a negative earnings number which will then be compoundend with insane interest rates. For someone who does not have cash given to them by parents or some trust/scholarship fund then the ROI is going to be even less as your CC debt will cripple you out of the gate. It has taken me years to get back into the positive. Looking back I should have gotten a job as a teller or such and used tuition assistance from an employer rather than jump right into college. The education system sells you this lie that paying them $30k/year will give you a better life. I’m 29 with an MBA and I would probably been better off being a manager at McDonalds.

Posted by anarcurt | Report as abusive

Here’s the value of my English degree from UC-Berkeley: negative $100,000. Yep, it’s worth less than nothing and was a complete waste of my time.

My advice to any humanities/arts major is to get a real major. And don’t listen to your hippy counselors when they tell you to “do what you love b/c it’ll all work out in the end if you’re just passionate enough”. All that is going to get you is a job that you hate more than if you would have just gotten a math/science degree in something that you weren’t passionate about. Well, if you can even get a job.

Lucky for me I got a good job selling cars to idiots who c/not afford them before the market crashed, and our banks stopped giving loans to broke a** losers. Now, at least I can afford to go back and get a masters of science in nursing.

Posted by skomalley | Report as abusive

The article and it’s ROI honestly does not explain things very well. There are many people that I have hired over the years that had no formal degree, two year, 4 year and MBA’s. The difference was in what they as individuals brought to the “school of life”. Some were more people oriented as well as team players with their own individual and significant contributions.

I will never forget being in a meeting of upper managers for a fortune 1000 company with over 25,000 employees. We were to participate in a roundtable discussion on the following years strategic goals for the company. Most of the managers being the same level were making roughly 185k – 205k per year. Since we were all from different parts of the country, everyone was asked to first introduce themselves. Most people would say, how long they were with the company, what particular city and state they came from as well as what college and degree they had attained. One of the new managers, said all the above as well as how he had a BS in Economics a BS in Pharmacology and finally an MBA in something else.

The next persons turn came up, and he said his name,the city and state where he was a manager for and that he was still getting his degree from the “school of life” but that he had the same title as the guy that just spoke. Some laughed, some did’nt but the fact is he was one of the most succesful people in that room.

So the degree is important,but I am not sure that being in debt with over 100k without some kind of work ethic, vision and specifically desire of whom you want to become or what you want achieve will get you the happiness or “success” you are looking for.

Posted by Chuck1960 | Report as abusive

eded

Posted by MinFL | Report as abusive

When I was 20, I was a college drop out. In my 20s I worked very hard to become an expert software engineer – mainly self-taught. By 31, I was VP of software engineering and had “made it.” Only after I had a child did I feel the need to formalize my education so that she could aspire to similar success. By 40 I had my master’s and now I teach part-time at a university. Not having a degree hung over me for a long while and now I finally truly feel as if I’ve “Made it.”

Posted by MinFL | Report as abusive
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