Academic journal article The Future of Children

Making College Worth It: A Review of the Returns to Higher Education

Academic journal article The Future of Children

Making College Worth It: A Review of the Returns to Higher Education

Article excerpt

Pressure on young Americans to attend and complete college is high and rising. President Barack Obama sees college as an "economic imperative that every family in America has to be able to afford" and has set as a goal that by 2020, "America will once again have the highest proportion of college graduates in the world." (1) A quick search of the popular press reveals many of the standard economic arguments in favor of attending college. Recent articles in the Washington Post and Education Week report that adults with a college degree have much lower unemployment rates and higher lifetime earnings than do their peers who do not attend college. (2) But despite the clear economic--and noneconomic--benefits that college-educated adults enjoy, the cost-benefit calculus facing prospective college students today can make the decision to invest in and attend college dauntingly complex. While policy makers and parents continue to push the nation's youth to enter college, the cost of attending college is increasing and students are borrowing more than ever to finance the investment. (3) Moreover, students today are taking longer than their peers in past decades to complete a college degree, a fact that itself can complicate the decision of whether to attend college. (4) In this article we review research on the varying costs and benefits of higher education and explore the complexity of the decision to attend college.

We begin by explaining the classic theory that describes the decision to go to college, taking note of factors that complicate that decision. We then review evidence about the return to college and the economic benefits that college graduates enjoy, and discuss the causal effect of attending college on earnings. We emphasize that the relative returns to a college education are rising--in terms of earnings--but are not the same for everyone who decides to attend. Earnings differ widely depending on program of study and the eventual occupation one pursues. Next we explore what is behind the recent rise in the earnings of those who attend college. Like many others, we suggest that the increase has been driven largely by technological change, which has, in turn, increased demand for workers with skills that complement the use of new technologies. We then briefly address the intensifying debate over whether college acts merely as a signal of skill that already exists at school entry or whether it fosters new skills. Next we discuss the possibility of nonpecuniary benefits stemming from college. Returning to the economic benefits of the college premium, we examine how college completion and school quality affect the premium. In closing we discuss the costs of different levels of higher education and student debt and show that the cost of college is properly considered as a long-term investment. The article concludes with a final assessment on the college investment, given the evidence we have to date.

The Decision to Attend College

According to the classic investment theory that describes the decision to attend college, individuals weigh the returns of the college investment against the costs, both direct (such as tuition) and indirect (such as forgone earnings while in college). (5) According to the theory, if the difference between the benefits and the costs is larger than the present value of a prospective student's lifetime earnings without attending college, the individual would attend. If everyone were to follow this simple investment model, we could deduce that for those who make the decision to attend college, the present value of the benefits exceeds the costs and that the investment is optimal. (6)

Individuals, however, may not always achieve the optimal educational investment prescribed by this model. On the simplest level, because both the costs and benefits of college can differ tremendously from one person to the next, individuals may not know ahead of time exactly what their costs and benefits will be. …

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