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Saturday, May 24, 2014

College Return on Investment

The Federal Reserve Bank of San Francisco (FRBSF) recently published their evaluation of the lifetime payoff of a college degree, concluding that college is a great investment.

We show that the value of a college degree remains high, and the average college graduate can recover the costs of attending in less than 20 years. Once the investment is paid for, it continues to pay dividends through the rest of the worker’s life, leaving college graduates with substantially higher lifetime earnings than their peers with a high school degree.

Meanwhile, Barry Ritholz, using similar data, concludes that a college education “shows a fairly poor return on investment. No wonder so many college graduates are unhappy with their student debt.”

What gives?

What is clear is that without a college education, the chance of earning the median wage is extremely low. There is really no choice in the matter. It's college or nothin' for most people. FRBSF recommends “redoubling the efforts to make college more accessible would be time and money well spent.”

We have seen this movie before. Not that long ago, people wondered if high school would payoff handsomely. It did and eventually high school for all became the publicly funded standard of the land. Everyone who graduated high school could count on a good job, decent salary and a secure future, so they said. And it was mostly true---then.

We are presently taking another turn around the same merry-go-round. Given current economic conditions and opportunities, governments might well conclude it is in the public interest to require and fund college for all. Once college for all is implemented, the Lake Wobegon fallacy comes into play. Just as with mandatory high school, reversion to the mean will occur.

Like medicinal tolerance, it takes more and more education to get the same effect. Soon, (and some people believe it is already happening), college will not be enough. It's inevitable. The pervasive assumption that if only everyone graduated from college, they could all land great jobs ignores the reality that there simply are not enough great jobs to go around for the people who think they made the investment in themselves to qualify for those jobs. And so reversion to the mean happens. The nature of average is that new data only establishes a new average for some of us to be above and some of us to be below.

Nevertheless, college for all is probably a necessary eventuality.

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