An Education Bubble: Is College Worth It?

Student loan debt exceeds a trillion dollars. A recent Pew study reports that fifty-seven percent of the general public believes that higher education fails to provide students with good value for their money. Some commentators warn of an impending education bubble similar to the recent housing meltdown with crashing prices as people realize they have over-invested in an asset that will not appreciate in value forever and does not guarantee success. And unlike your house, if your education is “under water,” it is almost impossible to walk away from your student loan. One entrepreneur is even paying people to drop out of school and start businesses. After all, Bill Gates and Mark Zuckerberg dropped out of college and became millionaires: Maybe you should too.

For the vast majority of students, dropping out would be stupid. Let’s do a cost-benefit analysis. Out-of-pocket costs for a UNLV undergraduate degree is about the same as a mid-sized car. A 2012 Ford Taurus has an MSRP of about $25,000, so does a Chevy Impala, a Dodge Charger and four years tuition, fees, and books at UNLV. While you are in school you forgo some income you could be earning while you’re attending class. We need to account for these opportunity costs too as well as the incremental expense for food and housing–the part above what you would have to pay to pursue your next best alternative. If you are taking out student loans to pay for college, those interest payments have to be factored in too.

The costs of college are easy to identify as you pay tuition bills, live in that cramped apartment and eat lots of macaroni and cheese. The benefits are harder to see because they vary and are realized in the future. In the simplest terms, the average American with an undergraduate degree earned about $20,000 more in 2010 than a person with a high school diploma. That means the payback period for the $25,000 out-of-pocket expenses for a UNLV degree is less than the income gain generated by two typical post-graduation years’ earnings. More generally, Professor Nasser Daneshvary of our Economics Department has calculated that the average Nevadan with an undergraduate degree will earn $1 million more over their working life than the average Nevadan with just a high school diploma. A Nevadan with a graduate degree will earn $1.77 million more than their fellow citizen with a high school diploma. When Nasser accounts for the costs of college, he finds that the average annual return on investment for an undergraduate degree is 9.3% and for a graduate degree 10%. Other people who have done similar work for different locations and time periods get similar results.

Understand that there is a great deal of variance around these average outcomes. For example, students with majors that develop strong computational skills (e.g., engineering, computing, accounting, finance) do much better than college grads with majors that do not promote these skills (e.g., education, liberal arts). Personal motivation, economic conditions, the school you attended and chance matter too. Some people will make nothing more as a result of going to college. A few will make a fortune. Still a 10% average annual return on investment is a good deal. It is about the same as the average annual return from the U.S. stock market over the last 50 years. And while you can certainly get rich from starting a company, with or without a college degree, the number of new business start-ups has plummeted during the recession and estimates suggest that only about 40% of small businesses turn a profit over their lifetime.

The research I cite is based on historical data. Some critics believe that the future will be different, that past relationships no longer hold. I seriously doubt that. The best predictor of future performance remains past performance. The cognitive complexity and knowledge required to obtain the highest paying jobs in our economy is increasing, not decreasing. And while a poor economy leads people with frustrated dreams to question the promises of their society’s institutions, we have experienced hard times before and the results for higher education have proven to be robust: Over the span of a person’s working life a college education is a very good bet.

If you don’t believe me, ask college graduates. That same Pew study that reported concern among the American public about the value of higher education notes that a whopping eighty-six percent of college graduates say their degree was a good investment for them. Or ask a college drop-out. The Bill and Melinda Gates Foundation donates millions of dollars to higher education each year. The Gates believe in higher education too.

So, stay in school. Get your degree. Realize that college gives you valuable tools that can give you an edge, but it doesn’t guarantee success. Nothing does. It is a competition and you are going to have to train hard, develop skills and leave it all on the field every day. That’s how it works. It is how it has always worked. Sorry if I’m bursting your bubble.