The economic benefits of a college degree continue to outweigh the costs of obtaining a degree, even in the face of constant changes in higher education, according to a series of essays from the Federal Reserve Bank of San Francisco (FRBSF).
The essays – three in total – comprise a new report from the Bank and examine whether the cost of college is still “worth it” for students, the rise of entrepreneurship as a focus of college, and the importance of lifelong learning.
Data show that the “boost to earnings from a college degree is large and persistent” and “leads to greater economic opportunities over a lifetime,” according to the essay written by Mary C. Daly, senior vice president and associate director of research at FRBSF, and Yifan Cao, a research associate.
When comparing earnings, Daly and Cao write, the value of a college degree is “apparent,” with college graduates consistently earning more than those without a college degree.
New college graduates begin with earnings only slightly higher than high school graduates – about $5,000 to $6,000 more – but over time the gap increases. According to the authors, the income gap increases to over $25,000 per year after 15 years. The average college graduate in 2011 earned about $20,000 more annually than the average high school graduate and the college earnings premium has averaged about $20,300 annually over the last four decades.
And while the recent economic recession impacted young Americans and recent college graduates, the value of a college degree and the insurance it can provide was proven, the authors write. College graduates fared better in both employment and pay during the recession, with less severe pay cuts and unemployment rates about half as high as those for high school graduates.
There is a growing concern in the U.S. about the rising cost of college and whether the economic value of a degree is indeed worth it. The answer, the authors write, “is almost always yes” because of the discounted accumulated lifetime earnings a college graduate can expect, which helps to balance the cost of college.
As an example, the authors use a college graduate with a total cost of $112,194 for four years of tuition (at $9,000 per year) and other expenses. If the graduate goes on to earn the average college-degree premium of $20,000 annually, he or she will see a total of $534,000 in discounted lifetime benefits, which yields a net return on college of over $420,000.
And while the “breakeven year” depends on the cost of tuition and the college earnings premium, the authors cite data showing that students paying $9,000 annually for four years of tuition can break even in nine years. On the higher end of the tuition spectrum, students who pay $45,000 per year in tuition can break even on their investment within 17 years.
The authors also note that college can have a positive impact on economic mobility, noting that “[f]or those born into households near the bottom of the income distribution, a college degree is the difference in reaching or not reach the top.” College graduates from the lowest income quintile (the bottom 20 percent) are more than six times as likely to rise to the top quintile as those who do not attend college.
One of the other essays in the report focuses on the emergence of entrepreneurship as an area of study for college students, which “offers an alternative to settling for an uninspiring major valued in the marketplace, or even skipping college altogether, to pursue a dream,” writes Jody Hoff, senior economic education manager at FRBSF.
The third essay, written by FRBSF President and CEO John C. Williams, focuses on the importance of lifelong learning.
Publication Date: 4/8/2015