Is a College Degree Worth Anything?

One of my favorite questions, the monetary value of a college degree, is back in the buzz. Last week the Wall Street Journal ran an article asking What’s a Degree Really Worth, with the alternate title "Earnings Gap Between College and High School Grads Small."

It seems that for some number of years the College Board, the lobbyingGrads Kit group  for colleges, had been citing $800,000 as the difference between lifetime earnings of college and high school graduates. They got that number by taking the difference in average annual salary for high school and college grads as measured by the Census Bureau (about $20K) and multiplying that by a lifetime of work. (Which apparently is 40 years. I would have guessed higher.)

It is a very crude calculation, but then I am not sure that the College Board ever claimed otherwise. According to the WSJ, until December their website did say that

Over a lifetime, the gap in earning potential between a high-school diploma and a bachelor of arts is more than $800,000. In other words, whatever sacrifices you and your child make for [a] college education in the short term are more than repaid in the long term.

That may oversell the value of a degree, but it is not, I don’t think, actually deceptive. $800K is a perfectly fair estimate for the lifetime total earnings difference, just like they say.

However, for somebody who wants to know if going to college is a sound investment, which is the underlying premise here, $800K is the correct answer to the wrong question. What a person in that position really needs to know is  the net present value of a college degree. The degree will result, presumably, in an increased income over the decades. If we imagine that increased income in the form of 45 annual payments, what is the value of that annuity today? Is that more or less than you have to pay for it?

The WSJ cites research by Mark Schneider, who was Commissioner of Education Statistics at the U.S. Department of Education under the previous administration. Last year he wrote a paper working out the actual net present value of a college degree, discounting the future pay differentials back into today’s dollars and netting out tuition, although not the income lost from not working during the college years. (It’s a good paper worth reading, available at if you sign up for a free account.)

The number Schneider gets for the net present value of college is $279,893. The WSJ article implies that the difference between this value and $800K is revelatory and weaves it into a narrative of how the College Board was hounded into removing the $800K figure from its website.

But for the same reasons that $800K answers the wrong question, comparing it to $280K is apples to oranges. If nothing else, the $280K is net of costs, that is, it is the profit from college, rather than the gross revenue number that the $800K approximates. In principle, college would still be a good deal if Schneider had come up with $1 as his number.

Moreover, all this misses an important larger point. Saying that college grads make more than high school grads is not the same as saying that college grads make more because they went to college. All these calculations beg the question of how much of the relationship between college and income is cause and effect and how much is mere correlation.

It could be, for example, that teenagers who are bright, hard-working, and ambitious tend to go to college. And then later in life they make more money because they are bright, hard-working, and ambitious adults. I am not saying that this is the whole story, but you’ve got to admit it qualifies as plausible.

From the point of view of a hypothetical 17-year-old considering the to college or not to college question, $280K is not the right number. What the teenager needs to know is not the net present value of the difference between average college and high school earnings but the net present value of his own expected earnings if he does or does not go to college. I do not know how to find that number, but it is fairly clear it is meaningfully less than $280K.

Of course, it could be argued that even meaningfully lower is probably still positive, and by definition if it is positive then college is a profitable investment. That is a valid argument for some teenagers thinking about some colleges, but not for all of them.

The Schneider paper calculates net present value numbers for different types of college. At the top of the heap were "nonprofit most selective" colleges, a.k.a. Ivies, which, despite astronomical tuition, had an average net present value of $500K. At the other end were the nonprofit minimally selective and nonprofit open enrollment colleges, with net present values around $170K. (Public open enrollment colleges did much better, presumably because of lower tuition.)

Discount that $170K because of the cause and effect vs. correlation problem, and factor in four years of lost wages while attending college, and it is quite reasonable to conclude that for the colleges at the bottom end of the prestige spectrum, particularly the private ones that charge high tuition, the degree is not worth it after all.

[Photo: Kit]


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