College Guide


September 10, 2012 3:06 PM The Lousy Investment?

By Daniel Luzer

Megan McArdle over at the Daily Beast wonders if college is becoming a bad investment. Because it now doesn’t guarantee a good job, she ponders whether it’s worth it. This is a very strange way to look at the purpose of higher education.

As she writes:

We all seem to agree that a college education is wonderful, and yet strangely we worry when we see families investing so much in this supposedly essential good. Maybe it’s time to ask a question that seems almost sacrilegious: is all this investment in college education really worth it?
The answer, I fear, is that it’s not. For an increasing number of kids, the extra time and money spent pursuing a college diploma will leave them worse off than they were before they set foot on campus.

Well yes, this is a good point. But it doesn’t mean college isn’t worth it. The better question to ask is: does it leave them worse off than they would be if they never set foot on campus? And that’s where this idea starts to break down.

The reality is that college graduates earn a lot more than people who don’t go to college. They make about 84% more over a lifetime than mere high school graduates. They’re also more likely to be employed than high school graduates, even if in somewhat crappy jobs, during times of economic recession.

So much of this college as bad investment talk comes from the realization that college is just a lot more expensive than it used to be. McArdle:

The price of a McDonald’s hamburger has risen from 85 cents in 1995 to about a dollar today. The average price of all goods and services has risen about 50 percent. But the price of a college education has nearly doubled in that time. Is the education that today’s students are getting twice as good? Are new workers twice as smart? Have they become somehow massively more expensive to educate?

No, not at all. What’s happened is that we’re just not devoting the same public resources to students’ education. It’s not that people are dramatically more expensive to educate; it’s that we’ve pushed more of the total cost of that education to students. The average state support for public colleges and universities (which between 75 and 80 percent of college students attend) was $6,532 in 2010. That’s a 7 percent decrease from 2009. It’s also that lowest level in the last 25 years.

This doesn’t mean, of course, that paying for college is a secure, responsible investment. It is more expensive, and college students aren’t assured the same benefits they used to be.

But the real problem is that wrong people—individual college students, rather than taxpayers—are making more of the investment. But they’re not getting paid any more than they used to.

Going to college doesn’t guarantee a good job and financial stability. That’s a problem, especially since students themselves now have pay so much for college. But not going to college at all virtually guarantees poor job prospects and financial instability.

But this is the problem with thinking of college like an “investment.” There are no other investments that work like this. College is now a necessary but insufficient condition for securing professional employment. So depending on the price of one’s college, college can be a pretty risky investment. Not going to college, in contrast, isn’t a risky investment; it’s pretty much a surefire way to ensure a lifetime of bad jobs and frequent unemployment.

[Note that I’m generally assuming “college” here includes all further training beyond high school, including vocational certificates. I’m not sure if that’s what McArdle means; it does change the nature of thinking of this as an investment, at least a little.]

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer


  • Megan McArdle on September 10, 2012 3:35 PM:

    A couple of things:

    I am specifically talking about the traditional four-year college education, not any vocational education--that's why I drew a distinction between workplace-based education, and college, in the piece.

    It's true that the contribution of states has declined. But we also see brisk inflation in private college prices, including the exploding for-profit sector. That can't be explained by declining support for state institutions--and moreover, while support has declined, it's still quite high. A lot of schools aren't getting as much as they were getting ten years ago, but they're getting more, adjusted for inflation, than they were 20 years ago, according to one of the experts I interviewed.

  • Daniel on September 10, 2012 4:09 PM:

    The average net price of private colleges is about $13,000 a year, which is actually lower than it was 5 years ago, and only slightly higher than it was a decade ago. Public colleges are really the only place where this matters.

    State colleges are getting more money, for sure, but they're also enrolling more students (and state populations are higher). Per pupil spending has been on the decline for more than 30 years.

  • NA on September 10, 2012 11:20 PM:

    Excellent post.

  • Walker on September 10, 2012 11:27 PM:

    Any calculations using sticker-price for tuition are fundamentally flawed. Colleges adjust so much back on the backend that you have to look at debt after graduation. For your average middle-class student, the discount rate can make it cheaper to go to an elite private institution than many state institutions.

  • Snarki, child of Loki on September 11, 2012 9:07 AM:

    it's the market in action! Most (75-80% as noted in the post) students go to public colleges, which compete with private colleges.

    So when 75% of the college market is forced to increase their prices, the rest (privates and for-profits) just follow along and rake in the money.

    Learn some capitalism, you might find it enlightening.

  • Shawn on September 11, 2012 3:41 PM:

    I have to echo what Walker said above about "sticker price", especially at elite private schools. I'm a recent graduate of Georgetown (one of maybe a dozen or two schools that guarantee meeting 100% of "demonstrated financial need", mostly through grants) and I come from a family that makes less annually than Georgetown's tuition. I graduated with less than $20,000 of debt total, and my parents took on even less. My sister, by contrast, attends Belmont University in Nashville, and my mom has to take on nearly as much debt to pay for her schooling annually as she did for my entire four years at GTown.

    The people who really get socked are the ones who go to what you might call "second-tier" private colleges, the ones with Ivy League ambitions but not Ivy League endowments or scholarship funds, where they'll charge $40,000 or $50,000 a year and really mean it.

  • Craigie on September 11, 2012 4:27 PM:

    Megan, thank you for your work on this topic. I do take issue with your belief that the taxpayer will take a bath on IBR. Barclays, which no one should be trusting after 2008, is completely wrong here; Barclays doesn't seem to understand how basic banking principles operate. IBR will be a huge money maker for the taxpayer, even before the taxable nature of the forgiveness is considered. That is, if any borrowers actually choose the IBR plan (which remains to be seen). Borrowers pay more interest over time in ICR and IBR. The "subsidy" to the borrower related to paying less than under Standard Repayment is very stingy in the USA compared with other countries -- another factor in making it a money-maker for the taxpayer.

  • Theron P. Snell on September 11, 2012 6:07 PM:

    Part of the issue was highlighted above: students are having to assume more and more of the direct costs of education because the "State" is cutting support. The problem: the education is a social as well as a personal good. By fixating on how much more someone may earn with a degree is to buy into the notion that education benefits only the individual. Yet, as Jefferson and others knew, our system of government cannot operate without an educated citizenry. And finally, we move into a world inwhich education is simply data collection leading to a credential...and is no longer a process. The personal value of an education, as Dawn Powell put it in her journal, is to provide joy in life even if the person has no money, is alone or marginalized.

  • Weber on September 12, 2012 3:23 PM:

    I find it terribly discouraging that no where in the comments is there recognition of the financial realities faced by the states and the feds. Do the math! There simply isn't money to increase support for education or anything else. When interest rates return to normal levels, debt service for both the states and the feds will climb and there will be even less money available.

  • Stefan Stackhouse on September 13, 2012 10:09 AM:

    Learning is always a good investment, because learning actually need not cost anything except the time that must be devoted to study. Learning goes on inside the student's head. For all but a very few specialized subjects, all the resources one really needs for learning are available for free at public libraries and over the internet, or very inexpensively elsewhere.

    Good college teachers can help with learning by guiding, coaching, and inspiring. They are helpful, but not absolutely necessary. There have always been highly motivated people that have managed to educate themselves without the help of college teachers. Eric Hoffer is one important public intellectual comes to mind. The help that college teachers can offer is worth something, but the value is limited.

    The credentialling that is done through formal education is a different matter. The credential of a diploma does have a very real and distinct value, and this value varies with where the diploma is from and what subject it is in. Because this value can be expressed as a present value of an expected future income flow, then the decision to pursue a formal education program that leads to a diploma is most certainly an investment decision. Where the cost of getting the diploma exceeds the PV of the expected future income flows, then it is indeed a bad investment. Where the PV is going to be considerably in excess of the cost, then it is a good bet. Such calculations are difficult to make, and people sometimes do get them wrong, but fundamentally this should be a rational approach.

    The big mistake people make is in confusing the two. This is understandable because colleges deliberately obfuscate on this. The truth, though, is that learning and credentialling are not the same thing, and certainly do not need to be the same thing. Credentialling may indeed be based in part upon achieving a certain amount of learning, but that constitutes only part of the hoops that one must jump through to obtain the credential. A claim on the part of colleges that a cost in excess of the PV of the expected future earnings of their diploma holders is justified because of all the learning their students will receive is not valid or rational. That learning is done by the students themselves, inside their own heads, and could mostly be done just as well by them without paying the college anything at all.

    This being the case, my advice for students: Pick the academic program and pursue the credential that makes rational sense to you, given your abilities and proclivities, but don't pay more for the credential than the PV of the additional income flow you can expect to earn from it. Shop around until you find a cheap enough program that works for you to provide a positive return. Don't spend or borrow a penny more than what is necessary for this, or fool yourself in thinking that such excess costs are in any sense an "investment". Also, learn to learn, and declare your independence from the educational establishment. Your learning is ultimately up to you, so start learning on your own, and keep on learning the rest of your life.