Dispatches from the Potomac#11 | The Value of a College Education

Is it worth going to college? Recently there are many in the US asking this question. The university education in the US is regarded as being among the best in the world, so what is going on?

This article was originally written in February for publication in the March 2015 edition of the Marubeni Group Magazine, M-SPIRIT.

Washington D.C. Office General Manager, Marubeni America Corporation    Takashi Imamura

Even with rising tuition, going to college pays off

Tuition is too high. Criticism of university education in the US is centered on this point. In fact, tuition fees (and other related expenses) have tripled over the last 20 years. This is significantly higher than the 1.5 times increase in consumer prices during the same period. The average annual tuition fee at a private four-year university is USD 31,000 this year. The fees at famous universities are especially high, with Columbia University at the top of the list at USD 51,000. Compared to the private schools, the average annual cost at state universities is lower at a little more than USD 9,000, but the rate of increase has been higher recently due to worsening state finances. On top of this, for both public and private schools there are also living expenses of more than USD 10,000 per year that must be paid.

Paying these inflated fees has become a heavy burden for the students. In the US, on average, about 30% of tuition fees are covered by scholarships, 40% is borne by parents and relatives, and the remaining 30% is paid by the student. This is not an amount that can be covered with the income from a part-time job, so about 70% of students make use of student loans. The debt accumulated while studying is no small burden. Students graduating in 2013 owed an average of USD 28,000; and the total outstanding loan balance nationwide reached USD 1.1 trillion as of the end of September 2014. The difficulty of repaying this debt is illustrated by the fact that delinquency rates on student loans remain high, at around 11%, even as the delinquency rates on other types of loans, such as mortgages and auto loans, have declined as the economy has improved.

However, even if bloated tuition fees and loan burdens have become a social issue, from a labor economics perspective, there is an enormous advantage gained from a college education in the US The evidence for this is the overwhelming wage gap between high-school and college graduates, a gap that continues to widen. The difference in the early 1980s was 64%, but by 2013, the wage difference had reached 98%. Since the lifetime earnings of college graduates will be an average of more than USD 800,000 higher than that of high-school graduates, even allowing a higher value for current income than for future earnings, student loans of about USD 30,000 deliver a good return as an investment in the future.

Even President Obama has remarked in a recent speech that “a college degree is the surest ticket to the middle-class.”

The risk of sapping the vitality of the US

Nevertheless, the recent burgeoning of university costs is having a noticeable effect on American society and the economy. Most significant is that the number of people seeking a college education has peaked, even though it is an investment that typically pays for itself. In 2013 there were 7.92 million students under the age of 24 enrolled in four-year colleges. Although this is more than 40% higher than the number 20 years ago, the peak was two years earlier. In the US, where the population continues to grow, since the wage gap between college and high-school graduates is increasing, there should also be an increase in the number of students going to college. This was true until recently. The halt of this trend suggests that more people are giving up going to college because of the high cost.

In addition, the inflation of tuition costs has occurred during a period of financial crises and slow economic recovery, which appears to lower the rate of return from an investment in a college education. In the current difficult labor market, there has been an increase in the number of college graduates working in jobs that do not require a four-year university education, and real wages for college graduates have fallen by nearly 3% compared to 10 years ago. Still the wage gap has continued to increase, because the working environment for high-school graduates is even more oppressive, with real wages dropping by more than 7%. In the US today, going to college is not so much about recouping the original investment as it is an investment to forestall the reduction in real wages.

There appears to be an increase in the number of colleges and areas of study for which the profit from a college education has become extremely low, or even negative. If we define this “profit” as the difference between a college graduate’s earnings for 20 years after graduation minus the cost of the education, and the earnings of a person who did not attend college, analysis shows that the “profit” from an engineering degree, regardless of the university, is nearly USD 500,000. If the degree is from a school like the University of California, Berkeley, this “profit” approaches USD 1.1 million. In contrast, for liberal arts majors this “profit” was negative for more than 10% of the subjects surveyed. This should not be misinterpreted. The value of a college education is not determined by the size of this “profit” calculation. To a student, however, the “profit” offered by a university or area of study is an important decision factor. For students burdened by large student loan debts, there is a natural tendency to focus on this “profit,” since they will have to pay back these debts once they graduate. As a result, fewer students choose universities or majors which have low or negative “profit” projections. This, in turn, hurts the operation of the school, leading to fears that there will be a loss of diversity in the range of schools and majors offered in the US This is a vicious cycle that is exacerbated by the inflation of tuition costs.

It is feared that the growing cost of higher education will feed the growing gap that is already a serious problem in American society. There are many universities at which students from lower-income families are charged extremely low tuition fees, such as Harvard University, for example, which has enhanced their scholarship programs to attract talented students, regardless of their income level. However, even at these universities, the tuition burden on students from middle-class families tends to be especially heavy, and it is not uncommon for students to choose to attend the state university with the lighter expense burden, even after being accepted to a more prestigious school. Children from wealthy families are not required to make this kind of choice, benefiting from large amounts of money invested in their education from a young age, making it easier to enter the famous universities. Moreover, many parents in these wealthy families are graduates of these famous universities; and in many cases there are legacy systems that give preference to the children of alumni during the admission process.

In the US, there is a dislike for rigid class distinctions. By continuing to offer ample opportunity to anyone with talent and a willingness to work hard, the country has maintained its vitality and the position as a world leader over a long period of time. In this respect, the inflated cost of a college education is a big problem that may lead to the many talented individuals becoming buried in disadvantaged environments, contributing to a further solidification of the division between classes. In recent years there has been a proliferation of on-line courses with low fees, and some signs of change, such as President Obama’s proposal of free tuition at two-year state colleges; but, there is no progress on reforms to improve the transparency of the basic management of the universities that are the source of the inflated tuition fees. I have great respect for the ability of American society to transform itself, but I sense that this long-term issue of upwardly spiraling tuition costs creates a serious risk of a loss of vitality in the US.