New Study Reveals the Annual Costs of Dropouts from One Freshman Class – Both to Themselves and Society

Washington, D.C. – As students across the country prepare to start their freshman year of college, more than 40 percent of them will not graduate within six years – costing billions of dollars in lost earnings for the students and millions of dollars in lost tax revenue, according to a new analysis by the American Institutes for Research (AIR).

AIR conducted a study that examined the more than 1.1 million full-time students who entered college in 2002 seeking bachelor degrees. Of that total, almost 500,000 did not graduate within six years – costing a combined $4.5 billion in lost income and lost federal and state income taxes.

The AIR analysis found that the 493,000 students who started college in 2002 but did not earn a degree within six years lost a total of approximately $3.8 billion in income in 2010 alone. The lost income would have generated $566 million in federal income tax revenue, while states would have collected more than $164 million in state income taxes.

“These findings represent just one year and one graduating class. Therefore, the overall costs of low graduation rates are much higher since these losses accumulate year after year,” explained Mark Schneider, a vice president at AIR who co-authored the report, The High Cost of Low Graduation Rates: How Much Does Dropping Out of College Really Cost?, with Lu (Michelle) Yin. “This is just the tip of the iceberg. While this report focuses on only one cohort of students, losses of this magnitude are incurred annually by each and every graduating class.”

The Obama Administration and the nation’s governors are seeking to encourage more students to earn college degrees because of the importance to the nation’s economic future of having a highly skilled workforce that can compete in the global economy. The AIR report looks at some of the financial implications of the efforts to have the United States once again have the highest concentration of college and university degrees.

“Students who start college and don’t graduate incur large personal expenses. They have paid tuition, they have taken out loans, they have changed their lives and they have failed in one of the biggest goals they have ever set for themselves,” said Schneider.

“Taxpayers have paid billions of dollars in subsidies to support these students as they pursue degrees they will never earn, and as a nation, we incur billions in lost earnings and lost income taxes each year.”

According to the U.S Bureau of the Census, young adults between the ages of 25 and 34 with a college degree, working year round, earn around 40 percent more than someone with some college who has not completed a degree and around two-thirds more than someone with just a high school degree. The life time earnings of a college graduate can exceed those of a high school graduate by as much as a half million dollars.

“Given these higher earnings, many governors are looking at a more educated population as a way of dealing with the growing fiscal crisis they face,” said Schneider. “Most states have state income taxes and they benefit directly from the higher incomes earned by college graduates.”

To generate these estimates, AIR researchers used data from the U.S. Department of Education’s Integrated Postsecondary Education Data System (IPEDS), Census reports of income levels, the 2010 federal tax rate schedule, and information from the Tax Foundation for the state income tax rates.

Some states are losing substantial sums of revenue because of the large number of dropouts from their colleges and universities. There are 14 states in which the income losses from this single group of dropouts exceed $100 million annually – ranging from California, with $386 million in lost income, and New York with close to $360 million, to Louisiana, Massachusetts, North Carolina and New Jersey, all losing between $100 and $107 million in earnings. See Table: States Losing More Than $100 Million in Income and $15 Million in Federal Income Taxes, and Their Losses in State Income Tax in 2010.

Federal income tax losses parallel these numbers: with losses in federal income taxes exceeding $50 million per year in California, New York and Texas and more than $15 million in losses from Massachusetts, North Carolina, and New Jersey. See Table: 2010 Income and Tax Losses by State for Dropouts Who Entered College in 2002.

The following provides a breakdown by state of the amount of income that was lost and the federal and state income tax revenue that those higher earnings would have generated.

The full report, and a breakdown of the financial implications of dropouts at each college campus, is available at www.air.org. Detailed data and tools to compare income and tax losses across states are online: www.collegemeasures.org. The website, CollegeMeasures.org, is a joint endeavor by AIR and Matrix Knowledge Group to help improve outcomes and performance among higher education institutions.

About AIR

Established in 1946, with headquarters in Washington, D.C., the American Institutes for Research (AIR) is a nonpartisan, not-for-profit organization that conducts behavioral and social science research and delivers technical assistance both domestically and internationally in the areas of health, education, and workforce productivity. For more information, visit www.air.org.

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