Is College Still Worth It?
Yes, but maybe not as much as it once was.
Is college worth it? With more Americans turning away from higher education, people are questioning whether college graduates are really better off than those without degrees.
It’s no secret that over the past decade, the public has soured on higher education. The signs are everywhere: College enrollment is down (see “College Enrollment Declines Deepen”). Public opinion has turned increasingly negative (see “Americans Lose Faith in College”). With wage growth for young people at record highs for much of the past two years, many new high school graduates are opting to get jobs instead. In response to this shift, a handful of colleges have cut tuition and some employers have dropped longstanding degree requirements. (See “In Hot Jobs Market, Teens Skip College,” “Cash-Strapped Colleges Court Reluctant Students,” and “It’s Getting Easier to Get Hired.”)
With the increase in young people turning away from college, one might assume that the much-heralded college wage premium—the gap between the earnings of college graduates and high school graduates—has disappeared. Perhaps, some may be hoping, the labor market has been so glutted by college graduates that a degree no longer makes much of a difference.
This is not the case. If anything, the wage premium is hovering near all-time highs. According to a recent analysis by the San Francisco Fed, the wage premium rose sharply for three decades beginning in the early 1980s. In 2000, the percentage difference between the average wages earned by workers with a four-year degree and workers with a high school diploma was about 68%. In the mid-2010s, it peaked at around 79%. It has since declined a bit to 75%, or around $30K a year. But this figure, needless to say, is still substantial.
Other estimates from the St. Louis Fed, the New America Foundation, the Burning Glass Institute, and the Institute for Higher Education Policy have come to a similar conclusion. Op-eds penned by university officials and policy experts insist that college really does improve your prospects in life. This line of messaging is perhaps summed up best by this headline that recently ran in The New York Times: “Let’s Stop Pretending College Degrees Don’t Matter.”
But hold on. Is the wage premium really the right way to estimate the benefits of college? Maybe not. A new wave of research is pointing out that the wage premium as typically calculated is hugely tilted towards overestimating the advantages of a college degree. Among other things, it does not account for the time value of money, the growing cost of college, or critical selection biases.
What are these considerations, and what happens when we incorporate them into the comparison?
1. Time value of money
The first thing that has to be accounted for is the present value of lifetime earnings. The wage premium is typically measured as the total difference in inflation-adjusted wages for a college graduate over a lifetime, resulting in a 75% wage premium.
But consider that collegians and noncollegians receive income along very different time paths. In their teens and early 20s, most collegians earn little income or (worse) go massively into debt. Meanwhile, most noncollegians earn income as full-time employees. And that income, on a discounted basis, is worth more than the money a college grad earns later, some of which is usually earmarked to pay back student loans (on average, over $30K for a bachelor’s degree). Failing to apply a discount rate biases the wage premium in favor of college, because it’s not accounting for any of these things.
The Georgetown University Center on Education and the Workforce, which does not adjust for the present value of dollars, estimated in 2021 that the lifetime median earnings of a college graduate are $2.8M vs. $1.6M for a high school graduate (a $1.2M difference). But once you apply a reasonable discount rate, the difference drops to under $1M. In a report for the think tank Third Way, Douglas Webber—a senior economist at the Fed—put the discounted earnings gap at $900K.
2. Ability bias
Next, you have to account for ability bias. On average, people who decide to go to college are different from those who decide not to go. College pre-selects for certain kinds of students (bright, conscientious, driven, or perhaps just raised by parents with plenty of money and connections) who are likely to do well whether they go to college or not. It’s not clear to what extent college graduates are being rewarded for what they learn in college or for abilities or backgrounds that they possessed long before they enrolled. The fact that those who graduate from a college tend to do better does not answer the question of whether any randomly chosen person would benefit from going there.