With the cost of college constantly rising, it's easy to wonder whether four years of college is worth it anymore.
But new research from the Federal Reserve Bank of New York concludes: yes, a college degree still pays off.
The average college graduate earns $78,000 a year compared to the $45,000 earned by someone with only a high school education, according to the analysis. That's a 75% premium, or more than $30,000 a year.
The wage premium for a college education rose from less than $20,000 in the 1980's to $35,000 in the 2000's. Since then, it has fluctuated between $30,000 and $35,000 a year.
The unexpected cost of college
While the price of college has increased significantly since the 1970's, students aren't paying as much as the price tags suggest, according to the study, which updated research from 2014.
While the sticker price continues to go steeply higher, with the average cost of college at $18,000 a year, the price students actually pay after grants and other assistance -- or the "net price" -- is around $8,000.
That means that if the average four-year college education looks like $72,000, it may come in more like $32,000 out-of-pocket once grants and other aid are factored in.
The net price is not only much lower than the sticker price, but it's also increasing at a slower rate, according to the researchers. The average sticker price of college grew from $5,000 annually to $18,000 between 1970 and today. But net prices increased from $2,300 to $8,000 during the same period.
And the tuition isn't always the biggest cost involved in getting a college education. The opportunity cost -- or the income a student loses out on when they take four years out of the workforce to go to college -- is much greater.
The strong job market has pushed up wages for those with only a high school diploma as well as those with a college degree. So while someone with a college degree will eventually command a higher salary, they still lose out on four years worth of wages, amounting to an average of $120,000, the New York Fed found.
A college degree is still a good investment
As an investment, a college degree has an average rate of return of 14%, the study found, well above the long-term return benchmarks for traditional investments like stocks at 7% or bonds at 3%.
But this isn't always apparent to families during the college search. Since the cost of college is up front and the benefits are doled out over many years, the economic value of a college degree is often hard to see.
The value of a degree was boosted by the technology expansion of the 1990's, but has gone down a bit in recent years. Despite the drop, the report says the overall long-term benefit of college still outweighs the costs.
We’ve all heard stories about people dropping out of college to start multi-million dollar businesses. People like Mark Zuckerberg, Michael Dell and Steve Jobs who threw off the chains of higher education and got right down to making money.
These stories lead some people to conclude that a college education isn’t necessary. That all you really need to succeed is grit, grind and old-fashioned street smarts. That college is just a waste of money.
Additionally, many graduates have had difficulty finding employment in their field of study. This leads people to believe that obtaining a degree doesn’t guarantee a higher paying job.
Porter Stansberry wrote:
I’d tell any teenager today the same thing: Forget about college. Instead, travel for a year. Go to several major cities. Work and intern in many different industries. Get a sense of the world. Meet people from other cultures. Learn what makes people tick. Learn history and geography.
Are these people right? Is college just for suckers who don’t know any better? Are those who don’t obtain a higher education just as likely to succeed as those who go straight into business after high school?
To answer those questions, we need to look at the data. Anecdotal stories are often misleading, and can be more inspiring than informative.
So what do the numbers actually say?
THE RISING COST OF EDUCATION
Before we can answer the question of college, we need to acknowledge that it’s costly.
There’s no disputing that the cost for college tuition is increasing. When adjusted for inflation, the average cost of tuition has more than doubled since 1986.
Additionally, attending college costs a larger percentage of household income, making it more difficult to attend without incurring significant debt.
But does that mean you shouldn’t attend? Let’s look deeper.
TEMPORARY JOBS
Adult female working on a laptop and smartphone at a wooden table. A blog post by researchers Jason Abel and Richard Deitz dug into the post-college careers of those who graduated from college between 2009 and 2013. Their findings are somewhat startling, at least on the surface.
45% of the graduates are working in a “non-college job,” meaning a job that doesn’t necessarily require a bachelor’s degree. On the surface, this seems to show that a college education isn’t necessary after all. If you’re going to end up as a barista, why spend 4 years and thousands of dollars at college?
But, as usual, there’s more to this story than meets the eye.
When you break the 45% down by job type, half are working in relatively high-paying jobs, like information processing and sales. Another 25% work in modest-paying jobs, such as office and administrative support. Only 20% of all recent graduates are working in low-skilled, low-paying service jobs. And in these categories, graduates are making more money than those with no college degree.
Additionally, those with degrees are much more likely to transition to much higher paying jobs. As Abel and Deitz say:
In addition, the composition of jobs held by recent graduates changes within the underemployed occupation categories as workers age. The percentage who are employed in the low-skilled service category drops by half, suggesting that these jobs were temporary for a good number of young graduates. By age 26 or 27, only 6.6 percent were still working in these low-paying jobs. The other two groups with the most significant declines include office and administrative support, and sales.
BOTTOM LINE
Underemployed graduates don’t stay underemployed for long. These jobs are usually stopping points before better paying jobs.
MORE LIFETIME EARNINGS
A recent study from Georgetown University found that, on average, college graduates earn $1 million more in earnings over their lifetime. Another recent study by the Pew Research Center found that the median yearly income gap between high school and college graduates is around $17,500.
By choosing not to go to college, you are essentially forfeiting $17,500 per year and $1 million over your lifetime.
That’s $1 million less in retirement and $17,500 less in disposable income every year. Before you don’t go to college, consider what you would do if you had an additional $1 million available when you retire. Would you buy a home? Create a fund for your children? Travel Europe?
BOTTOM LINE
Not attending college costs a lot. Much more more than people think.
LESS UNEMPLOYMENT
Finally, the unemployment rate for those with college degrees is significantly less than those without. Consider these statistics from the Bureau of Labor Statistics.
The unemployment rate for those with a high school degree or less is three times higher compared to those who did attend college.
BOTTOM LINE
You are far less likely to be unemployed if you have a degree.
SO WHY ARE SO MANY UNDEREMPLOYED?
Of course, these statistics raise the question: why are so many recent college graduates underemployed?
There are several reasons for this. First, and most obviously, the number of workers with degrees has increased over the last forty years. Since 1965, the percentage of graduates has tripled, rising from 10% to 30%.
More graduates in the workforce means more competition, fewer available jobs, and less pay.
Second, the U.S. economy has been in the Great Recession since 2008, and recessions always lead to higher unemployment among recent graduates. As the Economic Policy Institute says:
Unemployment of young graduates is extremely high today, but not because of something unique about the Great Recession and its aftermath that has affected young people in particular. Rather, it is high because young workers always experience disproportionate increases in unemployment during periods of labor market weakness—and the Great Recession and its aftermath is the longest, most severe period of economic weakness in more than seven decades.
It’s not that there is a problem with higher education or that college degrees are somehow a waste of money. The economy as a whole has been hurt, which in turn contributes to unemployment and underemployment.
From the data, it can be tempting to conclude that trying to make it without a degree might be a valid solution, but this isn’t the case.
While it’s true that it’s currently challenging for graduates, it’s even harder for those without degrees. Paul Taylor, executive vice president of the Pew Research Center, says:
“The driver of that widening [gap between income] is not so much that today’s college graduates are doing better than yesterday’s college graduates are doing; it’s that today’s high school-only graduates are doing worse than yesterday’s high school-only graduates,” he says. “The real story is the collapse in economic opportunity for people who do not continue their education beyond high school.”
Yes, college graduates are facing more challenges than before, but it’s even more difficult for those who have never attended college. Ultimately, not going to college is a decision that sabotages you for the rest of your life. Your income and earnings will always be lower and you will always have to fight harder for a job.
It’s trendy for people to advise against college. They say things like, “If Richard Branson didn’t go to college, why should you?” And while there’s obviously a little bit of truth to this question, it misses the main point: most people aren’t Richard Branson.
If you want to be a rogue entrepreneur who relies on no one and clears his own path, then maybe college isn’t for you. But the percentage of people who shouldn’t get a degree is very low.
If you want to set yourself up to succeed, a college degree is clearly the way to go.
MORE EARNINGS WITH FINANCIAL ASSISTANCE
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