School is in session! Every
September, when I begin working with high-school seniors in 2 economics classes
– AP Economics and IB (International Baccalaureate) Economics, I talk about
using economic precepts to understand the market for college education that
they are about to enter. You may have experienced as an applicant and/or a parent
of an applicant the daunting prospect of dealing with the edu-industrial complex.
As most of us realize, the
need for and cost of getting an undergraduate college degree have increased
enormously. The demand for a baccalaureate (BA or BS) degree has steadily risen,
especially since 2009. This fall, some 20.2 million students are expected to attend American colleges and
universities, a 32% increase since fall 2000. Acceptance rates at “selective”
colleges have declined as more people apply for a fairly fixed supply of
spaces; Stanford University’s was 5.7% in 2013
(the latest available), one of the lowest.
As college counsellors always
mention, “There’s a college for everyone.” The US has greatly benefited from
having at over 3,000 4-year colleges and universities. These schools reflect a noteworthy
diversity of educational approaches to gaining an undergraduate degree. There
are 4,612 post-high-school degree-granting institutions (that include 2-year
schools as well). They range from the very small (Shimer College in Chicago, IL
has 81 students) to the very large (Ohio State University in Columbus, has 40,201
undergrads). California has the largest number of colleges, 399.
More young people than ever have
a BA, reflecting the increased demand for college education. In 2014 (the
latest year available), 34% of Americans ages 25 to
29 had at least a BA, compared with 24.7% in 1995 and 16.4% in 1970, according
to the National Center for Education Statistics (NCES). Interestingly, 37% of
25-29 year old females in 2014 have at least a BA and 31% of males. Between
2000 and 2013, the percentage of college students who were Black rose from 11.7%
to 14.7%, and the percentage of students who were Hispanic rose from 9.9% to 15.8%.
The NCES now projects that awarded BA’s will increase 14% between 2010 and 2021, up from 7.1% previously
forecast. College-going has deepened and broadened in the US. This is a very
good thing from multiple perspectives. The demand for college education has
increased significantly, and will continue to. The growth of supply (or
capacity) of colleges and universities to accommodate more students has lagged.
When demand exceeds supply, prices rise. And college prices (tuition and fees)
have indeed risen.
On the expense side, State
funding of public colleges and universities has dramatically declined over the
past decades. For the University of California (UC) system, state funding now accounts
only for 13% of its total budget, down from 32% forty
years ago. There are 2 inter-related consequences of these changes in demand
and funding sources, tuition and fees have increased and the mix of students is
changing.
Reflecting a national trend,
tuition at UC/Berkeley is twice as expensive as 20 years ago, after adjusting for inflation. Out-of-state
freshmen admitted to UC/B now embody 30% of first-year undergraduates, an
all-time high. For the first time in 2011, student tuition exceeded state
funding receipts. Tuition
remains the largest single source of UC’s core operating funds. Non-resident (out-of-state) tuition at UC/B is $35,850
this fall; tuition for California residents is $12,972. Thus it’s no surprise that over 60% of UC/B’s
undergraduates receive some form of financial aid, including grants,
scholarships, work study and loans.
Having a BA confers many
benefits. People with a 4-year college degree have a much lower unemployment
rate, 2.6%, about half of the current overall rate. Is receiving a BA still
worth the time, money and effort? Answering this key question depends on what your
objective is. If the true value of education is not what you earn, but what you
learn, then getting a BA is without doubt beneficial from a personal as well as
societal perspective. If a BA’s worth is more narrowly viewed from a pecuniary
perspective, it still is worthwhile. Young adults with a BA degree on average
earn $48,500 in
median income, more than twice as much as those without a high-school diploma
or its equivalent and 62% more than young adult high-school completers. Paradoxically,
folks with less than high-school completion have seen their real income rise
slightly since 2009. Young adults’ median real income with either a BA or a HS
diploma has declined somewhat since 2009.
Unsurprisingly, the selection
of a specific academic field of study is a major decision, with lifetime
implications. The Hamilton Project has examined lifetime incomes for college graduates and their chosen
majors. Over their entire working life, the typical college graduate will earn
$1.19 million dollars. This is more than twice as much as the lifetime earnings
of a typical high school graduate ($580,000), and $335,000 more than that of a
typical associate degree graduate. Lifetime earnings vary widely across majors.
Over one’s entire career, the highest-earning majors will earn about
two-and-a-half times what the lowest-earning majors will earn, a range from
over $2 million for some engineering majors to about $800,000 for early
childhood education. Chemical engineering represents the college major with the
highest expected median lifetime income, $2.1 million. You can visit the
Hamilton Project’s clever interactive portrayal of expected
lifetime income to see what specific majors – including yours – can earn. As a
reference point, if you choose to major in economics, the Hamilton Project says
median expected income reaches a peak 19 years into your career ($85k in 2014$),
and totals $7.07 million (in present discounted value) over your 47-year work
lifetime. My, my.
Despite all this impressive
lifetime earnings and income information, I continue to wonder whether the
income premium that holders of a BA degree have enjoyed – and continue to enjoy
– will be sustainable as more and more young people gain a college degree. If US
yearly economic growth maintains its historically-unimpressive sub-4% level and
college grads represent an ever-increasing proportion – say 35-38% – of people
entering the workforce, having a BA will become less “distinctive” when they’re
first on the job market. As we’ve already seen during the past 5 years, employers
have adjusted their hiring practices and requirements. Some jobs that
heretofore didn’t require a college degree now do. Also, many recent college
graduates have found work only in lower-level jobs that may not require a
degree, and thus are “underemployed.” The underemployment rate for persons
21-24 years old is currently 14.9%, more
than double the 7.2% overall unemployment rate for this age-group.
Then there’s the
ever-increasing cost of attending college that has propagated a college loan
problem. The media often broadcasts several statistics to characterize this
issue: student loan borrowers owe a total of $1.2 trillion and 7 million
borrowers are in default. Notions of a student loan “crisis” are widespread.
Several politicians,
including 3 running for President in 2016, Hillary Clinton and Marco Rubio,
have offered plans to remedy this problem and help cut the cost of college. Shooting
way beyond the moon, Bernie Sanders proposes making public higher education
free, although his policy wouldn’t apply to private colleges, where 20% of
students get a BA, nor cover students’ living expenses. Good luck Bernie.
In an insightful article
Susan Dynarski, a professor at the University of Michigan, concludes that
students with the largest loan debt aren’t usually the ones who are defaulting,
it’s the students with relatively small loans who have dropped out and didn’t
graduate or have low-paying jobs that provide insufficient income to pay off
their loans. Surprisingly, the default rate steadily drops as borrowing
increases. Over half of defaulters have borrowed less than $10k by the time
they left college. In fact, 34% of students and ex-students whose debt totals $5k
or less default on their loans. In contrast, the 3% of students with loans of
$100k or more – usually students in law school, medical school, professional
school or grad school – default only 18% of the time, principally because after
they receive their degree their income more than covers their loan payments.
Possible solutions to the student
debt issue include extending loans from the standard 10-year period to 25
years, which is the norm in other nations and basing payments on the student’s
current income (often called pay-as-you-go plans). I’ve identified here policies that can remedy these and other difficulties young people have
with the edu-industrial complex.
So when virtually every
politician reasonably exhorts young people to get a college degree, there can
be both positive and adverse consequences as more folks attend college
(and hopefully graduate; only 59% of US college students graduate
within 6 years[1]).
The individual and societal benefits are substantial. But as ever more people
receive their BA’s, expectations about what having this hard-earned degree will
provide in terms of potential income may need to be revised unless these same
politicians start legislating substantive policies that increase the demand for
the nation’s goods and services, especially those that require hiring college-educated
people. Unfortunately, I’m not holding my breath.
[1] As of September 2014, U.S. college
graduation rates rank 19th out of 28 countries studied by the OECD.
