The Value of a College Degree

September 2nd, 2014
in econ_news, syndication

by Jaison R. Abel and Richard Deitz - Liberty Street Economics, Federal Reserve Bank of New York

Editor's Note: This post is the first in a series of four Liberty Street Economics posts examining the value of a college degree.

Not so long ago, people rarely questioned the value of a college degree. A bachelor’s degree was seen as a surefire ticket to a career-oriented, good-paying job. Today, however, many people are uncertain whether going to college is such a wise decision. It’s easy to see why. Tuition costs have been rising considerably faster than inflation, student debt is mounting, wages for college graduates have been falling, and recent college graduates have been struggling to find good jobs. These trends might lead one to believe that college is no longer a good investment. But when you dig into the data, is this really true? This week, we examine the value of a college degree in a four-part blog series. In this first post, we do the basic math and show that despite what appears to be a set of alarming trends, the value of a bachelor’s degree for the average graduate has held near its all-time high of about $300,000 for more than a decade.

Follow up:

To estimate the value of a bachelor’s degree, we measure the costs and benefits for the average college graduate—calculations outlined in detail (with appropriate caveats) in our recent article in the New York Fed’sCurrent Issues series. The costs of college are the average tuition and fees paid by undergraduates plus the “opportunity costs,” or the wages one gives up while in school, estimated as the average wages of someone with only a high school diploma. The benefit of college is the “college wage premium”—the extra wages one can expect to earn having obtained a college degree, estimated as the average wage of college graduates compared with the average wage of those with only a high school diploma, summed up over a working life of more than forty years.

To come up with a dollar figure for the value of a bachelor’s degree, we use the concept of net present value (NPV). The NPV captures the flow of the costs and benefits of going to college over time. During the first four years, the costs of college result in a negative cash flow, followed by a positive cash flow that is received over one’s working career (the college wage premium), taking the time value of money into account (meaning that future years are “discounted” at a standard rate of 5 percent, because money earned in the future is worth less than money in hand today).

The chart below plots the NPV for a bachelor’s degree between 1970 and 2013, calculated using our methodology and expressed in 2013 constant dollars. We estimate that the value of a college degree fell from about $120,000 in the early 1970s to about $80,000 in the early 1980s, before more than tripling to nearly $300,000 by the late 1990s, where it has remained, more or less, ever since. Despite drifting down somewhat in the aftermath of the Great Recession, the value of a bachelor’s degree has remained near its all-time high.

Chart 1 shows Net Present Value of a Bachelors Degree 1970-2013

Another way to assess the value of a college degree is to see how long it takes to break even on the upfront investment. Here, we use the discounted cash flows that feed into our NPV calculation to determine the first year in which the sum of annual cash flows turns positive. The chart below plots the number of years required to recoup the cost of a bachelor’s degree earned between 1970 and 2013.

Chart 2 shows Years to Recoup the Cost of a Bachelors Degree 1970-2013

The time required to recoup the costs of a bachelor’s degree has fallen substantially over time, from more than twenty years in the late 1970s and early 1980s to about ten years in 2013. So despite the challenges facing today’s college graduates, the value of a college degree has remained near its all-time high, while the time required to recoup the costs of the degree has remained near its all-time low.

Of course, it’s possible that some part of what we estimate as the value of a college degree isn’t driven by the skills an individual acquires while in college: people who earn a college degree may simply differ in their innate skills and abilities from those who don’t obtain a degree. Maybe some college graduates would have earned higher wages even if they had never gone to college. Separating out these two effects in research studies is extremely difficult. Still, while we can’t rule out the possibility that this type of selection is at work, it seems likely that at least on average, the value of a bachelor’s degree remains substantial.

Why has the value of a college degree remained so high even while tuition has been rising and the wages for college graduates have been falling? The primary reason is that the wages of high school graduates have also been falling, reducing the opportunity costs of going to school and keeping the college wage premium near its all-time high.

While our estimates make it seem like college always pays handsomely, that may not always be the case for everyone. Our next blog post will look at what happens to the value of college when it takes five or six years to complete a degree instead of four. Our third post will show that when we look at the distribution of wages for college graduates, college actually does not appear to have paid off for a sizable fraction of those who made the investment. To wrap up the blog series, our final post will examine whether there are any recent signs of improvement in the labor market for college graduates.

Disclaimer

The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Source: http://libertystreeteconomics.newyorkfed.org/2014/09/the-value-of-a-college-degree.html#.VAWolfldUSg


About the Authors

Abel_jaison Jaison R. Abel is an officer in the Federal Reserve Bank of New York’s Research and Statistics Group.

Deitz_richard Richard Deitz is an assistant vice president in the Bank's Research and Statistics Group.









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