College as economic investment

Really nice piece by Dylan Matthews last week in Wonkblog about a report focusing on college as “Return on Investment.”  Yglesias made the important point that this analysis totally left off graduation rates.  A lot of universities have much lower graduation rates than others and investing in some college, but not a degree, is a really bad investment.  Anyway, not surprisingly, your major matters.  The good news is any major is not better than going to college:

Screen Shot 2013 05 09 at 3 30 23 PM

And I’d like to say I’m very pleased to see Social Science among the higher-earning majors, but some of this seems suspect to me.  I.e., since when is Psychology not a social science?!  And how much of this is a feature of the fact that the higher-earning majors are dominated by men?   I’ve already written a lot about the pay gap here, so I’m not going to go back into it (clearly some very real discrimination, but a lot of this is the different choices women and men make about where they work and how much they work), but because of this fact, any field that has more men in it is going to, ceteris paribus, have higher earnings than a field with a lot of women.  Would be very curious to see how statistical control for gender might have affected this.

Naturally, I was curious to go to the PayScale data and check out the ROI for the universities that are and have been a part of my life. I’ve told a number of people that as much as I loved my time at Duke, no way is it worth the additional amount of money that it costs over a place like UNC or NCSU for a in-state student.  It’s worth more, but not that much more.   According to this data, though, I’m wrong.  As expensive as Duke is, over a lifetime of earnings, it more than pays for itself and comes in at 38, well above the NC state schools.  I was talking about this with my little little sister while at by big little sister’s law school graduation on Saturday:

(and here I am with big sister– also an attorney– big little sister, and little little sister).

And in the conversation what hit me was that there’s a huge  effect for selection bias here that is entirely uncontrolled.  An amazing amount of Duke undergraduates go onto careers in medicine and law (it’s a little ridiculous at the reunions).  Very few go into social work, teaching, etc.  I suspect that if you took this into account, things would like quite different.  I suspect that a lot of what’s going in in Duke’s great ROI is not that the Duke education (and networking) led to such a lucrative career, but 1) people who graduate from Duke are among the most intelligent, ambitious, and disciplined college graduates out there, and 2) they disproportionately choose to go into high paying careers.  Duke is great, but I suspect if you put all these same Duke graduates and sent them to East Carolina, you’d find that ECU had an absolutely unbelievable ROI.  But in reality, ECU (or UNC, NCSU) draw a very different set of undergraduates, on average.

In the end, this is a neat analysis and fun to think about, but one should be very careful in trying to draw too many meaningful conclusions about the relative value of an education at these various colleges.  Without a doubt, a college education is a great investment, but to say whether one college is truly a better investment than other– for any given student– is a much more fraught and questionable endeavor.

About Steve Greene
Professor of Political Science at NC State

6 Responses to College as economic investment

  1. Mike from Canada says:

    While I’m not dubious of a college or university educations value, I’m skeptical of the numbers for the same reason you point out and one or two others.
    An education is a commodity, but it’s also different, in that what you put in, you get out. You can’t just buy an education, you must buy and earn it.

    But you can also over pay for the education. Any money you pay for that education you must pay back, unless someone gave you the money. If you over pay you can find yourself in severe economic difficulty trying to pay them back and this will intrude into your lifetime earnings, especially if your not savvy in getting a loan and finding all possible cheap sources of money.

    The study compares earnings rates but they should also compare lifetime earnings in comparison to college. For example, using back of the envelope numbers: (7% doubles the investment every 5 years)

    $50,000 @7% over 45 years = $1.050 million dollars.
    $100,000 @ 7% over 45 years = $2.1 million dollars.

    Without knowing the average cost of a college education (or a range) it’s hard to tell what the equivalent lifetime earnings would be. But when you compare the cost of any investment, you need to compare it somewhat equally, in terms of lifetime earnings. But I note that they get the benefit of the invested college funds, and the money from their high school level jobs:

    $1.05 million + $1.5 million = $2.550 million
    $2.1 million + $1.5 million = $3.6 million

    The problem with this is, will the parents give the money if they are not going to college? Not likely.
    Difficulty in procuring a loan, or certainly not at federal student interest rate levels.
    You can’t get a scholarship for cash to invest in the stock market.

    Certainly it depends on the type of person. Some are simply not going to get through college, no matter how many tutors you throw at them. On the other hand, I’ve met some university graduates and thought that if they could graduate university, anyone could, including my dog.

    The type of person who would start investing at 20 is a rare person indeed. No matter who or how many times people tell them that they should, the majority will not, even though they might be better off investing in the stock market then investing in a college education.

    The type of person who would consider investing their college education fund is probably the same type of person who would carefully consider all their options, and have the ability to deny themselves and have willpower, to get them through the hard times no matter what path they took. They would do equally as well in college.

    I’d also suggest it depends on where you are at the economic cycle. Those entering college, or midway through in 2008/2009 probably would have been better off putting every single dime they had into dividend index funds, or index funds without benefit of hindsight. They would have doubled their money in two years. They could have taken out half, used it as tuition, then left the other half to compound for the rest of their life and been up an extra 1 to 3 million.

    There are those who are willing (and able) to do certain jobs with just high school and very short courses who make very high salaries. For example those people who work on oil rigs. Not the kind of job I would want, even if I could physically do the job. $10,000 a month with full benefits and _very_ good pension plans. I know a guy who works on industrial AC equipment who makes similar money with similar benefits. Trained on the job. Get’s flown all over the world.
    Hates his job.

    I think the college education is far more important for getting a job that a person really likes, and loves going to. The type of job that gets you jumping out of bed early thinking about what your going to do for the day, rather then keeping you up at night dreading the next day. Figuring out what that career is, well, that’s the hard part for a lot of people.

  2. Mike from Canada says:

    I went looking for a graph or table of incomes vs schooling over a long period of time (say 50 years), but I couldn’t find anything.
    I did find this 2008 special report from Stats Canada:
    A selection of data on schooling from Canadian stats. It breaks down further into trade schools, high school, college, university, no diploma at all vs age level along with comparisons to the US in schooling attainment and comparisons of salary to those with or without a high school diploma.

    It doesn’t hold any surprises except perhaps the level of difference between University and all others, including high level college. The rest are pretty much close together, while the salaries for University graduates are head and shoulders above the rest.

  3. Mike from Canada says:

    Or this from the National Center for Education Statistics (USA):
    Showing women making significantly less (25% less) salary regardless of education level, or in spite of their level of education.

  4. itchy says:

    Relevant question: Are you like, 6-foot-6, or are your sisters 5-foot-2?

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