Is College Worth It?

It’s a query that would have been unthinkable a generation or two ago. College was once – and in fairness, to a large extent, still is – viewed as a path to the middle class and a cultural rite of passage. But those assumptions are, on many fronts, being challenged. Radical changes on the cost and benefit sides of the equation have thrown the once axiomatic value of higher education into question.

Let’s talk about money first. It’s no secret that the price of a degree has climbed rapidly in recent decades. Between 1985 and 2015, the average cost of attending a four-year institution increased by 120 percent, according to data compiled by the National Center for Education Statistics, putting it in the neighborhood of $25,000 per year – a figure pushing 40 percent of the median income.

That increase has left students taking more and bigger loans to pay for their educations. According to ValuePenguin, a company that helps consumers understand financial decisions, between 2004 and 2014, the amount of student loan borrowers and their average balance size increased by 90 percent and 80 percent, respectively. Among the under-thirty crowd, 53 percent with a bachelor’s degree or higher now report carrying student debt.

Then there’s time to consider. Optimistically, a bachelor’s degree can be obtained after four years of study. For the minority of students who manage this increasingly rare feat, that’s still a hefty investment: time spent on campus can’t be spent doing other things, like work, travel, or even just enjoying the twilight of youth.

And for all the money and time students are sinking into their post-secondary educations, it’s not exactly clear they’re getting a good deal – whether gauged by future earnings or the measurable acquisition of knowledge. Consider the former: While there is a well acknowledged “college wage premium,” the forces powering it are up for debate. A Pew Research Center report from 2014 shows the growing disparity to be less a product of the rising value of a college diploma than the cratering value of a high school diploma. The same report notes that while the percentage of degree-holders aged 25-32 has soared since the Silent Generation, median earnings for full-time workers of that cohort have more or less stagnated across the same time period.

Meanwhile, some economists contend that to whatever extent the wage premium exists, it’s impossible to attribute to college education itself. Since the people most likely to be successful are also the most likely to go to college, we can’t know to what extent a diploma is a cause or consequence of what made them successful.

In fact, some believe the real purpose of formal education isn’t so much to learn as to display to employers that a degree-holder possess the attributes that correlate with success, a process known as signalling. As George Mason Professor of Economics (and noted higher-ed skeptic) Bryan Caplan has pointed out, much of what students learn, when they learn anything, isn’t relevant to the real world. Professor Caplan thinks students are wise to the true value of a degree, which could explain why almost no student ever audits a class, why students spend about 14 hours a week studying, and why two-thirds of students fail to leave university proficient in reading.

Having spent the last 550-ish words bashing graduates and calling into question the legitimacy of the financial returns on a degree, you might fairly ask if I’m saying college really isn’t worth your time and money. While I’d love to end it here and now with a hot take like that, the truth is it’s a really complicated, personal question, and I can’t give a definitive answer. What I can offer are some prompts that might help someone considering college to make that choice for themself, based on things I wish I’d known before heading off to school.

  • College graduates fare better on average by many metrics. Even if costs of attendance are rising, they still have to be weighed against the potential benefits. Income, unemployment, retirement benefits, and health care: those with a degree really do fare better. Even if we can’t be sure of the direction or extent this relationship is causal, one could reasonably conclude the benefits are worth the uncertainty.
  • Credentialism might not be fair, but it’s real. Plenty of employers use education level as a proxy for job performance. If the signalling theory really is accurate, the students who pursue a degree without bogging themselves down with pointless knowledge are acting rationally. As Professor Caplan points out in what seems a protracted, nerdy online feud with Bloomberg View’s Noah Smith, the decision to attend school isn’t made in a cultural vacuum. Sometimes, there are real benefits to conformity – in this case, getting a prospective employer to give you a shot at an interview. Despite my having never worked as a sociologist (alas!), my degree has probably opened more than a few doors for me.
  • What and where you study are important. Some degrees have markedly higher returns than others, and if money is part of the consideration (and I hope it would be), students owe it to themselves to research this stuff beforehand.
  • For the love of god, if you’re taking loans, know how compound interest works. A younger, more ignorant version of myself once thought I could pay my loans off in a few years. How did I reach this improbable conclusion? I conveniently ignored the fact that interest on my loans would compound. Debt can be a real bummer. It can keep you tethered to things you might prefer to change, say a job or location, and it makes saving a challenge.
  • Relatedly, be familiar with the economic concept of opportunity cost. In short, this just means that time and money spent doing one thing can’t do something else. To calculate the “economic cost” of college, students have to include the money they could have made by working for those four years. If we conservatively put this number at $25,000 per year, that means they should add $100,000 in lost wages to the other costs of attending college (less if they work during the school year and summer).
  • Alternatives to the traditional four-year path are emerging. Online classes, some of which are offering credentials of their own, are gaining popularity. If they’re able to gain enough repute among employers and other institutions, they might be able to provide a cheaper alternative for credentialing the masses. Community colleges are also presenting themselves as a viable option for those looking to save money, an option increasingly popular among middle class families.

There’s certainly more to consider, but I think the most important thing is that prospective students take time to consider the decision and not simply take it on faith that higher education is the right move for everyone. After all, we’re talking about a huge investment of time and money.

A different version of this article was published on Merion West.

No, the Interest on Your Student Loan Isn’t Too High. In fact…

It seems like more often than not I’m opening these blog posts with an apology for a multi-week hiatus. Since nobody’s emailed to check on my well-being, I can only infer my readership has gotten on fine without my wonk-Jr. takes on public policy and other matters of high import. Fair enough; but don’t think your demonstrated lack of interest will spare you from a quick update.

Actually, it’s all good news: I’ve been having fun learning R (a statistical language), looking for a new apartment, and testing the limits of a 27-year-old liver. I saw Chance the Rapper and a Pirates game in Pittsburgh, which was awesome. The last article I wrote had some real success and was republished in several places, even earning a shout-out from John Stossel:

The big update is that my stint as a (purely) freelance writer has mercifully drawn to a close; I now write for a non-partisan public policy group. In fact, this very blog was one of my strongest selling points, according to my manager. It just goes to show you, kids: if you toil in anonymity for two years, eventually something will go your way.

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Okay, enough about me. Let’s talk about a topic close to the heart of many millennials: student loans. More specifically, I want to talk about the interest rates charged on undergraduate student loans.

That interest rates are too high is, unsurprisingly, a common gripe among borrowers. If I had a nickle for every twenty-something I’ve overheard complain that the federal government shouldn’t profit off student loans…well, it still wouldn’t cover one month’s interest. However, this sentiment isn’t limited to overqualified baristas; popular politicians like Elizabeth Warren and Bernie Sanders–and even unpopular politicians–have publicly called for loans to be refinanced at lower rates and decried the “profiteering” of the federal government. From Bernie Sanders’ website:

Over the next decade, it has been estimated that the federal government will make a profit of over $110 billion on student loan programs. This is morally wrong and it is bad economics. Sen. Sanders will fight to prevent the federal government from profiteering on the backs of college students and use this money instead to significantly lower student loan interest rates.

Under the Sanders plan, the formula for setting student loan interest rates would go back to where it was in 2006. If this plan were in effect today, interest rates on undergraduate loans would drop from 4.29% to just 2.37%.

It makes no sense that you can get an auto loan today with an interest rate of 2.5%, but millions of college graduates are forced to pay interest rates of 5-7% or more for decades. Under the Sanders plan, Americans would be able to refinance their student loans at today’s low interest rates.

As one of those debt-saddled graduates, and one of the chumps who took loans at a higher rate of interest, I would obviously be amenable to handing over less of my hard-earned money to the federal government. But as a person concerned with the larger picture, I have to say this is a really bad idea. In fact, rates should be higher, not lower.

First of all, the progressive case for loan refinancing or forgiveness only holds up under the lowest level of scrutiny. Such a policy would overwhelmingly benefit borrowers from wealthy families, who hold the majority of student loan debt. Conversely, most defaulters hold relatively small amounts of debt. Fiddling with interest rates shouldn’t be confused with programs that target low-income students, like the Pell Grant, which are another matter entirely and not the subject of my criticism.

More to the point, the federal government probably isn’t making any money on student loans. Contrary to the claims of Senators Warren and Sanders, which rely on estimates from the Government Accountability Office (GAO) and put federal profit on student loans at $135 billion from 2015-2024, the Congressional Box Office (CBO), using fair-value estimation, shows student loans costing the federal government $88 billion over the same period.

The discrepancy between the CBO and GAO figures comes from the former’s inclusion of macroeconomic forecasts. Essentially, the CBO thinks the risk of default on student loans is higher than the GAO does, due to forces beyond individuals’ control.

Evidence suggests it’s unwise to underestimate the risk associated with student loans. According to a study by the liberal think tank Demos, nearly 40% of federal student loan borrowers are in default or more than 90 days delinquent. Add to that the fact that student loans are unsecured (not backed by collateral or repossessable assets, like a car or house), and they start to look like an incredibly risky venture for the federal government, and ultimately, taxpayers.

That conclusion is deeply unpleasant, but not really surprising if you think about it. Ever notice how the interest rates on private student loans–approximately 10% of the market–are much higher? That’s not because private lenders are greedy; it’s because they can’t lend at the rate of the federal government without losing money.

This is all important because the money that finances student loans has to come from somewhere. Be it infrastructure upgrades, federal support for primary education, or Shrimp Fight Club, the money spent on student loans isn’t available for competing priorities. This is even more important when you consider the loss the federal government is taking on these loans, the cost of which is passed onto future taxpayers in the form of higher taxes or lower spending. Since higher education is only one among infinite human desires, we need to decide how much of our finite resources to devote to it. Properly set interest rates are one way (probably the best way) to figure that out.

The irony, of course, is that doing so would require the government to act more like a private lender–the very thing it’s designed not to do! Our student loan system ensures virtually anyone who wants to study has the money to do so, regardless of the likelihood they’ll be able to repay. One of the nasty side effects of this indiscriminate lending is a large amount of distressed borrowers, who now find themselves in the uncomfortable position of digging out from under a mountain of debt they likely shouldn’t have been able to take on.

More so than other forms of government spending, student loans have specific, discernible beneficiaries: the students who get an expensive education financed by the taxpayer at below-market rates. Sure, you can argue there’s some spillover; society does benefit from having more highly-trained workers. But most of the time, highly skilled labor is rewarded with higher wages. That being the case, is it really too much to ask for borrowers to pay a level of interest that reflects the actual cost of issuing their loans?

Yes, this would be discouraging for some: particularly those who want to pursue non-remunerative fields of study. That’s not such a bad thing; higher interest rates would steer people away from obtaining degrees with low salary expectations, which would–by my reckoning–reduce rates of delinquency and default over the long term. They would also help mitigate some of the pain of defaults when they do happen.

But–you might protest–you can’t run the government like a business! And sure, a lot of the time, you’d be right. However, I really think this is one area where doing so is appropriate–even desirable. Hear me out.

When the government can fund itself through profitable investments rather than zero-sum transfers, it should. If we’re going to have a government of any size (and few suggest that we shouldn’t), then we need to pay for it. Which sounds like the preferable way for that to happen: voluntary, productive, and mutually beneficial investments in society; or the forceful appropriation of private resources? I’m not suggesting the former could entirely replace the latter, but when it can, I think it absolutely should.

Astute readers will realize if the government decides to lend profitably, it will have to compete with private lenders, which would cut into its margins and make its presence in the market redundant. So maybe it’s just a pipe dream. But if profitable lending isn’t possible, the federal government should at least try to minimize losses. One way or another, that means higher interest rates.