Monday, May 16, 2011

The Muddled College Education Value Debate: Value And Affordable Are Not The Same Concept

There is an article on Bloomberg about the value of a college education, "U.S. College Education Isn’t Worth Price: Report" that is typical of the confused debate in politics and the media about higher education.

Investment value (or just value) and affordable are two different concepts. A $10 million commercial office complex may be a terrific investment value, but I may not be able to buy it because I cannot afford a $10 million purchase, even with reasonable bank financing.

The same is true for a college education. According to the Bloomberg article, a college education results in a $20,000 per year increase in earnings. On the other hand, a four year private college could cost $100,000 to $200,000. A 40 plus year investment return on $200,000 of $20,000 per year is almost a 10 percent return. Ten percent is a very decent 40 year return on $200,000 and comparable, if not better, to a return in the stock market.

The public, politicians and the media should have two different concerns about the price of a college education. Is it worth the investment? Is it affordable, with or without loans?

College Value

The answer to the first question is that yes, a four year college education, so far, has returned an increase in a worker's earnings that justifies the price of the education. The resulting increase in wages is a fair and adequate return for the investment. See my previous post, "Four Year College Degree Expected Wage Premium: No Signs Of Tuition Bubble."

College Cost

The answer to the second question about cost, is that to some people it is affordable and to some it is not, like all expensive things. Some college students have parents or grandparents that can afford to pay for their college. Some students get scholarships. Some students, after graduation, will make enough to repay college loans. Some recent graduates, because wages generally start low and increase over a worker's working years, will find it a tremendous burden on their budgets to repay loans used to finance a college education in the first few years after graduation, but will be able to repay their college loans. A college education may not seem to be of value to some right after graduation, but its value will be become evident over time, as their earnings increase.

For other prospective college students and graduates, an expensive private college education may be out of reach. Some of these students will go to more affordable state schools, to below average tuition cost colleges, or default on their student loans. Some will not got college.

Public Debate

The public and political debate about college costs is about what government should do, if anything, for those who skip college because they cannot afford or cannot finance their college education. There is value to a college education, but for some college is too expensive. What if anything more should the government do about those prospective students that can neither afford nor finance their college education?

Skip The Interest

One suggestion I have raised before on this blog is to eliminate the interest charge for some students on their student loans. If it is to society's benefit to foster a college education for groups that cannot afford to go to college, why should the government charge them interest on their student loans? The monthly repayment cost of a $200,000, 10-year 8 percent student loan will drop by a third from about $2,400 to about $1,600 a month, if the interest rate went from 8 percent to zero.

Proper Debate

The media, politicians and the public should stop confusing value with cost because it obscures the solution. A college education, at its current cost, has value by increasing future earnings about $20,000 per year. A college education is expensive at its current costs, and may be out of reach for some. The public debate is not about lowering college costs, but about what to do for that limited subset of prospective college students who cannot afford college with or without loans.

1 comment :

  1. The Student Loan Corporation had a recent infographic on the ROI of particular majors. At the end of the day, it's the major that will determine the career, although the school you go to has a lot to do with the type of job you have as well. Take a look at the SLC infographic here: