Is College a Good Investment?

Last night, I went to a debate on the value of college and relied heavily on some great work by the Hamilton project. On average, college is a fantastic investment. Here’s why:

1. Benefit vs Cost:

  • Benefit: 450K in PDV based on this discounting
  • Cost82K on average for four years of college plus opportunity cost of not working
  • Return: This amounts to a ~5.5X return! That is enormous. On an annual basis that accounts for when cash flows come in, this investment yields 15 to 18%, which is more than double the average return on stocks over the last 60 years (~7%), as well as many other asset classes such as corporate bonds (2.9 percent), gold (2.3 percent), long-term government bonds (2.2 percent), or housing (0.4 percent) according to the Hamilton project.
  • Note that this holds even though tuition has been increasing and will likely continue to hold for a  while since the gap between the benefits and costs is so large.

2. Lower Recession Risk: Not only do you make substantially more money, you also face substantially less risk of losing your job in bad times. So on a risk adjusted basis, college is an even better investment.

3. Higher returns are broad-based and do not appear to reflect only selection on ability:

  • Card 2001 argues that the returns on students who are on the margin or attending college or not have similarly high returns from going to college. “Marginal returns to education among the low-education subgroups typically affected by supply-side innovations tend to be relatively high, reflecting their high marginal costs of schooling, rather than low ability that limits their return to education.”
  • As Looney & Greenstone put it, “there are many factors that play a role in a worker’s lifetime earnings. This analysis focuses on the average earnings of a college graduate compared to the average person with only a high- school diploma. But we all know that each person is different, and it’s possible (and even likely) that individual college graduates have different aptitudes and ambitions, and might even have access to different levels of family resources. All of these factors can impact earnings. However, the evidence suggests that these factors don’t drive the impressive return to college; instead the increased earning power of college graduates appears to be caused by their educational investments (Kane and Rouse 1995, Card 1995, 2001).”
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About ozidar

Graduate student at UC Berkeley, studying public finance & labor economics. https://sites.google.com/site/omzidar/
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2 Responses to Is College a Good Investment?

  1. Pingback: Long Run Growth in Real Per Pupil Public Education Spending | owenzidar

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