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Major choice also impacts future earnings just as much as college choice, as does the eventual choice of a career. For example , the median lifetime earnings of an individual working in a STEM (science, technology, engineering, or mathematics) field is $3 million but only $1.2 million for someone in the health support sector.

Differences between individual school’s financial aid policies can change the calculus for low-income students even more dramatically. For example, Princeton, Rensselear Polytechnic Institute, and Notre Dame all offer a 30 year income premium that is 6.5 to 7 times the cost of attendance. But for students whose families make under $30,000 a year, the financial payoff is 73 times the net price of attendance at RPI, 122 times the net price at Notre Dame, and 192 times the net price at Princeton.

But most students don’t pay the full sticker price of tuition - especially at private schools. When we look at the median net price (the actual amount paid after subtracting for grants and scholarships), the cost gap between public and private schools narrows but persists. 2

The results reveal patterns in the financial value of degrees. Research universities (both public and private) outperform their non-research peers, which are outperformed in turn by engineering schools. Public institutions, which educate some 70% of the nation’s students, perform as well as many private schools at a lower cost. This data suggests that students at many prominent liberal arts schools pay for more prestigious facilities and faculties - but not better career outcomes. Ivy League graduates pay the most but reap the greatest benefit of all non-engineering schools.

To accurately measure the earnings bump graduates receive thanks to their bachelor’s degree, Payscale takes this expected income of a college graduate over his or her career and subtracts the total income they would have made during that time if they did not attend college. To do so, Payscale subtracts the median wage of a high school graduate over those 30 years as well as over the four years a college graduate spent attending college instead of working. This resulting figure - the earnings bump from attending college - is on the y axis. 1

Payscale draws on its information about alumni salaries. It calculates the expected earnings of a newly minted graduate over a 30 year career by summing the median incomes of alumni from his or her school who graduated between one and 30 years ago. This assumes that a class of 2013 graduate will have a comparable income in 5 years to the current income of someone who graduated (five years ago) in 2008 - an assumption we will address later.

We see this in the above figure, Lifetime College Payoff, which demonstrates the financial payoff of attending 1,511 different American colleges and universities as an undergraduate. The data comes from an analysis by Payscale, a salary data and software company for individuals and businesses.

Judged from a financial perspective, a bachelor’s degree has a positive return on investment that beats the returns of the stock market, corporate bonds, and the housing market.

College may still be, on average, a worthwhile investment. But for American higher education, a ‘D’ is still a passing grade.

How do we resolve this paradox that college is a sound financial investment, yet an increasing number of students find themselves unable to pay back their loans? When it comes to educating students and preparing them for careers without indebting them, how do we grade American higher education?

College should not be defined by financial payoff. But all appeals to the value of a liberal arts education or cultivating civic virtue are moot for all but a wealthy minority if a college education is prohibitively expensive.

In contrast, the research on the financial value of a college degree all concurs: A bachelor’s degree is a sound investment whose value is growing. The extra income graduates earn compared to high school graduates more than compensates for the high cost.

America’s colleges and universities are enduring a crisis of faith among the public. As we wrote last week in The Supersizing of American Colleges , due to a subsidy-fueled spending spree, the cost of college has increased over the past 30 years faster than the price of healthcare, housing, or just about anything else. Tuitions, student debt, and student loan default rates have all skyrocketed, leading indebted graduates to malign their degrees and pundits to argue that college is not worth the price tag.

Each dot represents a different college. You can search for a college by name or hover over a dot for more information. Data source: Payscale.

Source: Georgetown Center on Education & the Workforce

Despite these variations, the Lifetime College Payoff figure indicates that college is a sound investment. The majority of schools offer a 30 year wage premium of over $200,000, or $6,667 a year in extra income compared to a high school graduate’s salary. Payscale’s analysis also subtracts the cost of college from this payoff to calculate the return on investment (essentially how much money you gained or lost by attending college) and finds only a few outliers with a negative return. And as you can see from their full list of schools here, when you account for net price, the return on investment is impressive.

Of course, most students can’t pay for their education up front. However, if we look at the ratio of graduates’ loan payments compared to their salary, 89% of institutions leave their median, financial aid receiving graduate with a ratio below 10%. This means they spend less than 10% of their salary paying back student debt - the conservative maximum amount recommended by the nonprofit FinAid. And every school in the sample has a median ratio below FinAid’s maximum sustainable debt burden of 15%.

Private schools rank poorly by this metric. However, graduates with higher salaries can more easily endure a higher ratio of debt payments. So private schools’ whose graduates earn higher incomes arguably do just as well for their graduates as public school graduates with a lower debt ratio but also a lower income.

The above figures all rely on salary data from Payscale. This means that individual schools’ data may be swayed by the selection bias of who is and is not reporting salaries to Payscale, or simply a lack of data. (A more detailed discussion of the data’s limitations can be found here.) Unfortunately, the Department of Education does not provide salary information, which makes Payscale’s data the best available.

While the accuracy for individual institutions may be imperfect, other analyses vindicate the macro conclusion that college is a sound investment.

The most common approach is to use data from the US Census and other national surveys that record average incomes by education brackets. Pundits often grouch that the ubiquity of college graduates has rendered a bachelor’s degree meaningless. Drawing from national survey data, however, a paper from the National Bureau of Economic Research (NBER) finds the opposite.

In the early 1980s, the average bachelor’s degree holder earned 45% more per year than the average high school graduate. Even as the number of college graduates steadily increased, that wage premium increased to 70% in the late 1990s and to nearly 80% today. The authors even speculate that the supply of college graduates may be too low.

The story here is that of rising income inequality in the United States: Technology has increased demand for skilled labor, rewarding college graduates and hurting those without college experience. So while the value of a college degree is increasing, it should be noted that macroeconomic forces - not improvements within higher education - are largely responsible.

Further, the average income of bachelor degree holders grew for decades but stagnated over the past 10 years. This means that the growing payoff of earning a degree over the last decade is a result of the collapse of unskilled laborers’ wages. This makes college grads relatively better off, but it is hardly a rousing defense of the value of college.

Among today’s young graduates, 50% are either unemployed or working jobs that don’t require a degree. Despite the bum deal of graduating during a recession, however, young graduates in 2010 still enjoyed an unemployment rate 9.3% lower lower than their peers who had only a high school degree.

Working off national level data similar to that used by NBER, The Hamilton Project finds that the wage premium even of young graduates has grown over time - from $4,000 a year (adjusted for inflation) in the 1980s to $12,000 today.

The financial logic of investing in college seems so clear that economist James Monks nonchalantly writes in the midst of the student loan crisis:

How difficult will it be to pay back one’s student loans? A total of $20,000 in student loans would require a payment of approximately $250 per month for 10 years. Some personal financial planners suggest that student loans should not exceed 10 to 15 percent of one’s gross earnings. Under this rule, an annual salary of between $20,000 to $30,000 would be sufficient to pay off the loan without due hardship.

College skeptics might counter that a college degree seems worth it only because smart, high-achieving people all go to college. Or that college’s true value is the expensive piece of paper that signals intelligence and motivation to employers.

These are important points. But the available evidence does suggest that while both critiques have teeth, they account for only part of the increased earnings of college graduates. A recent Washington Post article covers some of the studies - from comparisons of twins of different education levels to investigations of the increased earnings of those who attend college without graduating - that suggest a college education itself leads to increased earnings.

The student loan crisis, however, is not a myth. As we covered in last week’s post, both debt burdens and delinquency rates have increased steadily over the past decade.

So why do so many students fail to reap the benefits of what seems to be such a sound investment?

Four theories of student loan defaults

Before we discuss what could be driving high default rates, we should note what is not responsible.

Entitled Millennials pursuing useless liberal arts majors and expecting a plush job to reward their knowledge of Plato and Pointillism does not account for the debt crisis. As of 2008, the average undergraduate worked 30 hours a week. Undergraduates also focus intensely on preparing for the job market. Nearly half study business, economics, or a STEM major. The rest mob programs linked to jobs, like law school and nursing programs. Only 12% study the humanities - and usually find careers, as they always have, in business, law, and the many fields that demand writing or artistic skills.

But the grouching is half right. In Academically Adrift, two sociologists find that class and study time at colleges has dwindled well below 40 hours a week and that 36% of students gain no critical thinking skills during college. But this is as much a reflection of higher education’s failings as the students’. Teaching time is down and grade inflation up. Students are only half responsible for this bargain of “you pretend to learn, and we’ll pretend to teach you.”

Nor can we ascribe the student loan crisis to a temporary result of the recession. It certainly contributed. More students decided to ride out the recession in college and state budget crises resulted in reduced subsidies to public colleges. But the trends of increased college spending, tuitions, debt, and default all pre-date the recession.

The first possible explanation for the paradox of high payoffs to college co-existing with high default rates is the backward looking bias of analyses of college’s financial value. The Payscale analysis, for example, assumes that today’s graduates will experience as great a payoff to college 30 years from now as a graduate 30 years into his or her career does today.

That’s an understandable assumption, and one reflected in analyses based on census data as well. So far, the returns for young graduates still seem high. But if the returns to college decrease in the future, this assumption will be a mirage. In the 1970s, research suggested that college was a losing proposition economically. But college students who ignored that advice benefitted as the college wage premium rose over the course of their careers. We could face the opposite situation in the future.

A second theory is that while college is worth it on average, rising costs mean that college is no longer worth it for an increasing number of students for whom the returns of attending college were already close to zero. And for every student, as debt burdens go up, the chances of defaulting increase as well.

Since most data is available only in medians and averages, it’s difficult to verify this theory. But some evidence suggests that the returns to college are so high that even these “marginal” students benefit. One recent study compared the earnings of students who just made the academic cutoff to attend the Florida State University System with those of students who fell just below the cutoff (and mostly did not attend college as a result). We might expect college not to be worth it for these students on the margins of qualifying, yet they reaped returns of 11%.

Nevertheless, experts most commonly endorse this explanation of rising student loan default rates.

A third, complementary explanation is the rise of “merit aid.” Financial aid has kept the actual price students pay for college from increasing as dramatically as sticker prices. However, an increasing amount of aid goes to students that don’t need it in the form of merit aid. The percentage of grants awarded to students in the lowest income percentile dropped from 34% in 1996 to 25% in 2012.

Sometimes merit aid is used to compete for top students, but much of “merit aid” goes toward drawing average students who can pay more tuition. This is especially true at state schools looking to attract nonresident students who will pay higher, out-of-state tuition costs. Either way, the effect is that the net price of college overstates the affordability of college for low income students since so much aid goes towards those that can afford it.

A fourth and final theory is that largely unknown, inexpensive, poorly performing schools are responsible for the lion’s share of defaulting graduates and delinquent debt. The main evidence for this theory is the context of who holds delinquent student debt.

The unemployed law school graduate facing a six figure student loan debt makes headlines. But student debt in default consists primarily of debts of one to several thousand dollars. Its holders are mostly individuals from low-income families who dropped out of college or even failed to complete high school (and took on student debt for a nondegree training programa or to pay for a child’s education). A disproportionate number are Hispanic or African-American.

So while big name schools are behind the spending race driving up tuition prices, the student debt crisis is best understood by looking at little known universities, community colleges, and even training programs. The schools with the highest reported default rates fit this description: their names are recognizable only locally, tuition is only a few thousand dollars, and nearly half of the students receive Pell grants (Federal grants for low-income students) supplemented by loans.

The rise of for-profit universities has likely fueled this. Good data on for-profits is scarce. But we know that for-profits now enroll 10% of all students, up from 3% in 1999, and account for a quarter of Federal aid money.

Not all for-profits deserve scorn, but many have drawn scrutiny for terrible graduation and default rates. The dominant business model is receiving accreditation by buying a non-profit college, aggressively marketing degrees of limited utility (including online accreditation) to low-income students and returning veterans, and then sucking up their Federal student aid money. Half of all student loans at the for-profit Corinthian Colleges fail, although the colleges still get their Federally backed loan payments. The Corinthian Colleges enroll over 100,000 students.

Is there a bubble?