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Social benefits of college education often get shortchanged in ‘cost discussion’

College Graduates
REUTERS/Mario Anzuoni
With all the focus on the costs of education versus expected income, the rising social benefits of a college education are getting ignored.

It’s college graduation season: “Pomp and Circumstance,” caps and gowns, commencement speeches and new careers. This also means there is much talk about the costs of college: debt burdens, lack of employment opportunities, college graduates moving home instead of getting their own places.

There are costs and benefits of going to college, some of which accrue to individuals and some of which flow to society. Unfortunately, our current system presumes that most of the benefits accrue to individuals, so they should bear most of the costs.

Comparing costs and benefits

Economic analysis starts from the premise that people will take an action if the extra benefits exceed the extra costs. However, this analysis only works if all of the relevant costs and benefits are factored into the calculation. If the total additional benefits of an action are understated or the total additional costs are overstated, then fewer people will take that action.

Education is subject to this problem because some of the costs and benefits are borne and received by college students and some by society.

This is the central rationale for state and federal support for higher education, but increasing debt burdens indicate that we as a society have decided that most of the benefits flow to individuals. College graduates are earning higher salaries and experiencing less unemployment, so higher tuition paid for through more debt is simply the cost of these benefits, right?

No, not quite. Two social benefits deserve special attention.

First, human capital formation through education is an important source of long-run economic growth. As Lawrence Katz and Claudia Golden [PDF] put it, “Broad access to education was, by and large, a major factor in United States economic dominance in the 20th century and in the creation of a broad middle class.”  The benefits of faster economic growth benefited both those who went to college and society as a whole.

What have we seen over the past 20 years, as debt burdens rose and state support grew slowly?  Lower growth rates of personal income and a more widely skewed income distribution.  This is a clear social cost.

A second benefit is that our democratic system relies on an educated populace.  Our problems are increasingly complex and the information flows faced by the typical voter are growing rapidly.  Despite calls for simple solutions to today’s problems, the world requires more people to have the critical thinking skills that a college education provides.

Clearly, families believe that their private benefits exceed their private costs since college attendance continues to climb.

Unfortunately, when I look at increasing debt burdens and rising tuition, I see a higher education finance system built on the premise that social benefits are shrinking relative to higher incomes and lower unemployment rates for college graduates.

I think this is wrong, and that the social benefits of higher education are only going to rise in the coming years.

Here’s a brief look at what’s viewed as the clearest benefit of a college degree: higher earnings.

Higher earnings, lower unemployment

Earnings are directly proportional to educational attainment, as shown by the chart below.

Associate degree holders earn roughly 80 percent of the income of bachelor’s degree holders.  The proportion falls to less than 50 percent for people who did not graduate from high school, and the proportion has fallen since 1991.

Unemployment rates tell a similar story.  The unemployment rate for all workers in 2011 was 8.9 percent.  According to the Bureau of Labor Statistics, unemployment rates in 2011 decreased with educational attainment:

  • Less than high school diploma: 14.1 percent
  • High school: 9.4 percent
  • Some college: 8.7 percent
  • Associate degree: 6.8 percent
  • Bachelor’s degree or higher: 4.3 percent.

Paying for college

The U.S. Department of Education reports that inflation-adjusted tuition at all types of colleges rose, tripling over the past 20 years. 

Minnesotans faced this challenge the same way other Americans did: by borrowing. The chart below shows state and federal grants growing slowly since 1991 while loans increased from about $200 million to just over $1.6 billion.

What does this mean for a typical student?  Nationally, the average level of student loan debt is about $25,000; however, this is a bit misleading because it doesn’t say anything about the range of debt loads. Derek Thompson of The Atlantic ran the numbers and found that the median student debt load was $12,500.  Further, 72 percent of college graduates owe $25,000 or less.

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Comments (9)

REAL social benefits

I guess additional income and ability to learn are "social" benefits, but when I saw the headline I was hoping to read more about the benefits to a college degree outside of dollars and cents.

College educated people tend to be have fewer problems with the law, have a longer life, live more healthy, are more likely to attend theater, more likely to vote, more likely to read a newspaper, more likely be volunteers and most importantly more likely to raise children who do all of those things as well.

The business of American may indeed be business, but much of what makes this country great has nothing to do with the bottom line of Fortune 1000 companies.

Just for perspective, 2010

Just for perspective, 2010 graduates in Minnesota carried $ 29,058 in debt (# 4 in nation), and MCAD, St. Scholastica and UMD were ranked among the highest student debt in the nation.

Source:http://projectonstudentdebt.org/files/pub/classof2010.pdf

What does 29,000 dollars in debt mean?

A payment of $ 333 per month every month for 10 years.

Source: http://mappingyourfuture.org/paying/standardcalculator.htm

That site very helpfully points out that a minimum annual income to handle those payments would be $ 50K.

What was the median income for possessors of a BA/BS?

$ 40 K in 2009.

I detect a problem.

college is education for a lifetime

Agreed. College pays off both individually and socially. Government support for education is an essential element for democratic societies and especially important for Minnesota, a state that has excelled in the past because of its investment in education and early on making that coeducational.

What's too often forgotten in this debate about education is that most young people today will have many jobs, even different careers. Critical thinking and imagination will be essential for them and for society. We need more young people interested in, and knowledgeable about government and politics as well as history. In other words, one function of education is to train citizens, not just employees.

Retrospective studies

are wonderful, but they, too, don't always tell the entire story.

When I graduated in 1982, my cost of a year of education (books, tuition, room and board) was ~$4,000. My first job was at $16,000 per year. A 4:1 ratio between my education cost and my 1st salary. It should be noted that 1982 was a recession period and it took me 6 months to find that job.

Last year, my son graduated. His cost of education was nearly $40,000 (we graduated from the same school by the way). He was a lucky one - the only member of his group of friends who got a job. His salary is $45,000 per year. Almost a 1:1 ratio.

Most of his friends have $20,000 or so in debt from a 4 year college costing ~$150,000. In many ways, that is not too bad.

But it presents a rather large debt to service based on their initial income levels. It certainly is going to impact their ability to afford things, like homes, that are key to helping us grow the economy.

Thank you for raising these points

The discussion of the benefits of anything these days always comes down to its market value. Our culture has put a price tag on everything, and we aren't interested in it if there isn't a good ROI. It's good to see a reminder that the value of some things cannot always be translated into dollars and cents.

Its really another bubble

College attendance continues to climb because in our FIRE (finance, insurance, real estate) economy, a college degree is mandatory. Attendance climbs because easy credit (student loans) are widely available and nearly all students are told that a college education is the best investment anyone can make. Well, it is... until the time comes that it isn't. While the Return On Investment for college may still be positive, we are now experiencing diminishing returns, because of the debt taken out by students needed to get an education.
http://www.businessinsider.com/student-debt-bubble-impending-doom-for-co...

Perhaps college shouldn't be for everyone? Perhaps it is the "elite" quality of college that makes it valuable. When an "elite" object becomes mainstream, it no longer possesses elite qualities. Maybe there is nothing wrong with sending a broader populace to vocational school - Germany does it, and look at how successful it has worked for them. For the US student loans, and therefore college attendance are a bubble.

Maybe I have the wrong perception, but why is it that the profession of economics spends so little time teaching people about bubbles, primarily credit-induced ones? Access to cheap and easy credit will always create too much unsustainable demand, and ultimately this comes crashing down.
http://www.psychopathiceconomics.com/DavosEconomicForum/hyman-minskys-un...

I don't think you're entirely wrong

Businesses, and the employees that are suckered into believing it, are shooting themselves in the foot by hiring college grads for next to nothing and skipping non-college grads altogether. The cost of higher education is, in part, due to the demand for it. The value of it is decreasing because the competition amongst college grads is so high that businesses can pay next to nothing for someone with a 4 year degree because there's always another one coming up. Plus, there's the benefit of having an employee desperate to pay off their education debt. But, really, it doesn't take a 4-year degree to do most of the jobs held by those that actually have one. A 2 year degree or an internship is enough to satisfy most jobs you find at banks (e.g., tellers, loan "specialists", etc.). These are definitely not rocket science, and they definitely don't pay enough to be worth the expense and time of a 4-year degree.

Now, I don't think that this means that access to a 4-year degree should be restricted at all. However, if businesses don't start considering appropriate education for appropriate positions and pay, that bubble is going to burst in a way that will make the housing bubble look like a minor economic inconvenience.

Another option is to completely subsidize a base education (2 year or equivalent degree) for everyone, but only subsidize anything beyond that for those that prove capability for a higher education. There's no reason we should be subsidizing the MRS degrees or career college students out there, but there's also no reason that we shouldn't be supporting a generally educated population.

Investments?

Here I thought you were going to talk about the value of the social networks people develop in schools. After all, that's what drives people to Harvard and Yale, not the quality of the education. If you have aspirations to be President or a member of the Supreme Court, becoming part of those social networks is a requirement.

The problem is that many schools don't provide nearly that much "social capital". A community college associate degree may help you when you apply for a job, but it isn't going to give you a personal network that will give you a lot of opportunities.

Which is the real problem with the "is college worth the investment" question. Just apply the same question to the stock market. Was General Motors stock worth the investment in the 1990's? No, you lost everything. That's the way investments in college degrees work. Some pay off. Some don't. And which is which is not all that predictable.

Its nice to point out the public benefits of education, but increasingly the costs of education are not really being covered by the public. Instead each individual student takes the risk and they need personal benefits to redeem their investment, regardless of the benefits to the public and society.

The personal benefits, aside from the alumni and social networks at prestigious universities, usually come in the form of a degree and certification of certain abilities. Whether those are worth the money depends on how they are valued in the marketplace. And their value can certainly be over-estimated, Steve Jobs and Bill Gates didn't graduate and get their degree. And increasingly employers are not willing to pay a premium for a college degree unless it is required by government regulation.

If you invest in stock, you can diversify. But if you invest in your own education, that isn't really an option. If we expect people to continue to educate themselves, we are going to need to figure out how to spread the risk so that it is not a huge individual financial gamble.

Cost

"Derek Thompson of The Atlantic ran the numbers and found that the median student debt load was $12,500. Further, 72 percent of college graduates owe $25,000 or less."

$25k seems reasonable (about the cost of a new car) if degree holders earn almost twice as much as non-degree holders. It starts getting dicey when someone holds loans equivalent to having a mortgage.

I'm a little suprised that there is not more difference between two and four year degrees. You'd seem to get almost 80 percent of a four-year degree earning potential with a two year degree.