College Worth: The Experts Weigh In

College Worth: The Experts Weigh In
  • Opening Intro -

    A generation ago, if you attended college and walked away with a bachelor’s degree, there was a good chance that a job offer and a career path were awaiting you.

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College has long served as a path to success, although in recent years doubt about its value has crept in.

New York Fed Researchers

Those doubts are being fed by some obvious trends: tuition is outpacing inflation, the economy is not nearly as strong as it has been and the number of good-paying jobs has been falling. Jaison R. Abel and Richard Deitz of the New York Fed recently evaluated the value of a college degree and found that a bachelor’s degree still provides a significant edge for graduates over those who do not attend or finish college. The two professionals placed a $300,000 value on a college degree, a significant amount of money that demonstrates strong return on a student’s investment.

The researchers evaluated the value of a college degree by measuring both the costs and the benefits for the average college graduate. Those costs include the average tuition and fees the typical undergraduate student pays as well as the “opportunity costs” he or she pays by attending college instead of going immediately to work. They noted a “college wage premium” exists for those who complete their education, taking the average wage of a college grad for 40 years and comparing it to the average wage for a high school diploma holder over that same period.

Net Present Value

Arriving at a dollar figure for the value of a bachelor’s degree proved a bit more daunting. To reach their findings, the researchers made use of the concept of net present value (NPV). In NPV, the flow of the costs and benefits of going to college are captured over an extend period of time. For instance, across the first four years, the costs for attending college present a negative cash flow, then is immediately followed by a positive cash flow that is enjoyed over one’s working career. Known as the college wage premium, this takes the time value of money into account. In others words, the future years are “discounted” at a standard rate of 5 percent, given that money earned in the future is worth less than the money you have on hand right now.

The researchers also examined the net present value of college degrees received from 1970 to 2013. The value of a college degree came in at about $120,000 in the early 1970s, falling to near $80,000 by the early 1980s. The value of a degree then began a near two-decade surge, hitting nearly $300,000 by the late 1990s. That value pulled back slightly in the most recent recession, but the researchers say that it is still near its all-time high.

Breaking Even

Another area that the researchers examined was the break-even point. Putting money out up front is a deep investment for many — the pay back can take years to achieve. Working with discounted cash flows, the researchers found that the payback is now achieved in about 10 years, down from the 20+ years in the late 1970s and early 1980s. The researchers also noted that students who attend college may already possess certain innate skills that others may not have, effectively giving them an edge going in.

The researchers also warned that while the gap between what college graduates earn and what high school diploma holders make remains wide, they also noted that wages for high school graduates are falling. In effect, the wage trend is also reducing the opportunity cost for attending college, what is also keeping the college wage premium high.

Additional Factors

Inasmuch as college does offer a handsome wage premium, there are other factors that should be considered. The researchers noted that taking six years to complete college drives up the opportunity costs. They also found that for some graduates realizing the benefit of a degree can take much time and in some cases it may never be reached.

See Also9 Ways to Save Money in College

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