Megan McArdle – a journalist you really ought to follow – in this week’s Newsweek cover story:
Why are we spending so much money on college?
And why are we so unhappy about it? We all seem to agree that a college education is wonderful, and yet strangely we worry when we see families investing so much in this supposedly essential good. Maybe it’s time to ask a question that seems almost sacrilegious: is all this investment in college education really worth it?
The answer, I fear, is that it’s not. For an increasing number of kids, the extra time and money spent pursuing a college diploma will leave them worse off than they were before they set foot on campus.
The price of a McDonald’s hamburger has risen from 85 cents in 1995 to about a dollar today. The average price of all goods and services has risen about 50 percent. But the price of a college education has nearly doubled in that time. Is the education that today’s students are getting twice as good? Are new workers twice as smart? Have they become somehow massively more expensive to educate?
A lot of ink has been spilled over the terrifying plight of students with $100,000 in loans and a job that will not cover their $900-a-month payment. Usually these stories treat this massive debt as an unfortunate side effect of spiraling college costs. But in another view, the spiraling college costs are themselves an unfortunate side effect of all that debt. When my parents went to college, it was an entirely reasonable proposition to “work your way through” a four-year, full-time college program, especially at a state school, where tuition was often purely nominal. By the time I matriculated, in 1990, that was already a stretch. But now it’s virtually impossible to conceive of high-school students making enough with summer jobs and part-time jobs during the school year to put themselves through a four-year school. Nor are their financially shaky parents necessarily in a position to pick up the tab, which is why somewhere between one half and two thirds of undergrads now come out of school with debt.
Effectively, we’ve treated the average wage premium as if it were a guarantee—and then we’ve encouraged college students to borrow against it. The result will be no surprise to anyone who has made the mistake of setting his or her teenager loose in a shopping mall with a credit card and no spending limit. Eighteen-year-olds demand amenities—high-speed Internet, well-upholstered classrooms, world-class fitness facilities—and in order to stay competitive, college administrators happily provide them. Then they raise the tuition for which the 18-year-olds are obediently borrowing the money.
When I was a senior, one of my professors asked wonderingly, “Why is it that you guys spend so much time trying to get as little as possible for your money?” The answer, Caplan says, is that they’re mostly there for a credential, not learning. “Why does cheating work?” he points out. If you were really just in college to learn skills, it would be totally counterproductive. “If you don’t learn the material, then you will have less human capital and the market will punish you—there’s no reason for us to do it.” But since they think the credential matters more than the education, they look for ways to get the credential as painlessly as possible.
That debate matters a lot, because while the value of an education can be very high, the value of a credential is strictly limited. If students are gaining real, valuable skills in school, then putting more students into college will increase the productive capacity of firms and the economy—a net gain for everyone. Credentials, meanwhile, are a zero-sum game. They don’t create value; they just reallocate it, in the same way that rising home values serve to ration slots in good public schools. If employers have mostly been using college degrees to weed out the inept and the unmotivated, then getting more people into college simply means more competition for a limited number of well-paying jobs. And in the current environment, that means a lot of people borrowing money for jobs they won’t get.
But we keep buying because after two decades prudent Americans who want a little financial security don’t have much left. Lifetime employment, and the pensions that went with it, have now joined outhouses, hitching posts, and rotary-dial telephones as something that wide-eyed children may hear about from their grandparents but will never see for themselves. The fabulous stock-market returns that promised an alternative form of protection proved even less durable. At least we have the house, weary Americans told each other, and the luckier ones still do, as they are reminded every time their shaking hand writes out another check for a mortgage that’s worth more than the home that secures it. What’s left is … investing in ourselves. Even if we’re not such a good bet.
Between 1992 and 2008, the number of bachelor’s degrees awarded rose almost 50 percent, from around 1.1 million to more than 1.6 million. According to Vedder, 60 percent of those additional students ended up in jobs that have not historically required a degree—waitress, electrician, secretary, mail carrier. That’s one reason the past few decades have witnessed such an explosion in graduate and professional degrees, as kids who previously would have stopped at college look for ways to stand out in the job market.
Ezra Klein responds:
But buried in McArdle’s piece is a curious admission. “Experts tend to agree that for the average student, college is still worth it today,” she writes. “But they also agree that the rapid increase in price is eating up more and more of the potential return.” So college is still worth it! The best numbers on this come from the Brookings Institution’s Hamilton Project, which calculates the return on investment for spending on college. Hamilton’s Michael Greenstone and Adam Looney estimate that the return on investment for an associate’s degree is about 20 percent, and the return for a bachelor’s is about 15 percent (mostly because bachelor’s degrees are much more expensive). That’s enormous compared to returns from the stock market, bonds, or (for you Ron Paul fans) gold.
They also estimate that the lifetime value of a bachelor’s degree is $570,000 relative to a high school diploma, at a cost of only about $109,740 (four times the $27,435 average cost figure). That’s a huge, huge return on investment.
But McArdle’s central claim is not that this return on investment doesn’t exist. It’s that it’s going away, especially for “borderline students” who have not been adequately prepared for college by their high school education. To figure out whether this is the case, I calculated how the value in dollars of getting a bachelor’s relative to getting a high school diploma has changed between 1991 and 2010, looking at full-time workers from age 22 and up.
The value of college has grown since the early ’90s, though most of that growth occurred in the 1990s, and the value has actually declined somewhat since the early 2000s. But it hasn’t grown anywhere near as fast as the cost of a degree. Here’s how the return on investment (as a percentage, calculated as value of degree divided by cost) has changed from 1991 to 2010:
Again, even today a college education more than triples your investment, an astounding rate of return compared to traditional investments such as stocks and bonds. Human capital is still very worth investing in. But unless growth in tuition costs is corralled, the return is going to keep falling. So McArdle’s piece was premature. The returns on college are enormous. But she does highlight a worrisome trend.