A Million Dollars More? Only for Some

We’ve all heard the refrain: “college graduates make a million dollars more in their lifetimes than high school graduates.” The “college premium,” as it is called, is used to justify a wide variety of personal and policy decisions. 

But the real college premium is an exceedingly complex concept that cannot be captured by a single number. As Margaret Spellings takes the leadership role in the University of North Carolina system, let us hope that she does not fall for the simplistic rhetoric concerning the benefits of college attendance that has led her predecessors to push for expanded enrollment—and that she has at times fallen for as well.

For the sum of information suggests that the college premium is only good for some of those who enter college—and that success is highly predictable. For instance, according to this UCLA study, 79.3 percent of college students who had A averages in high school earned a degree within 6 years after graduation, whereas only 21.2 percent of students with C or lower averages did so. Additionally, 81.6 percent of students with two-score SATs of 1300 (out of 1600) or higher completed within six years, whereas only 30.4 percent of those with SATs lower than 800 finished.

Chart 1. Six-Year Degree Completion Rates, by High School GPA, SAT Scores, and Cohort

Chart 1A

It may be that, despite the shrill rhetoric pushing for higher rates of college attendance, young people are figuring out the odds on their own and seeking other alternatives.

To start, there are varying claims of how the college premium has changed recently. It has generally been rising since the early 1980s—rapidly at first. Some studies suggest it has been rising again in recent years, others the opposite. In one Cleveland Federal Reserve Bank chart, the premium appears flat for 2009 to 2011.

Chart 2. Wage Premium by Terminal Degree

Chart 2A

Others, such as this Pew Study, show the wage gap to increase recently. However, in one aspect, the Pew chart may be misleading. Most others are like this one from Business Insider, which show the premium to be increasing, but only because the wages of high school graduates are falling faster than those of college graduates.

Additionally, the actual lifetime earnings premium that is generally being used today is closer to $800,000 than $1,000,000.

Deconstructing the premium provides great insight. The Cleveland Federal Reserve Bank has divided the situation into two age groups, above 30 and from 22 to 29. For the older group, their data says that it is indeed rising. For the younger group—the ones closest to their decision to go to school—the premium is declining. 

Another way to break down the premium is by the actual level of attainment. And doing so reveals some very important observations. The first is that, according to the Cleveland Fed, a great deal of the so-called college premium is due to people with advanced degrees, rather than mere bachelors degree holders (see Chart 2 above.).

A second key observation is that there is very little premium for those who fail to get their degree. According to the Pew report linked to above, college dropouts earn a scant $2,000 more per year on average than high school graduates. Given the opportunity cost of attending college rather than working full time or learning a manual or technical skill, and given the likelihood that they drop out with some debt, it would appear that there is a price to pay for starting college without completing it. 

Another way to meaningfully divide college graduates is according to major. Some majors earn well, others do not. According to Chart 3 below (from the Cleveland Fed report), those who earn degrees in the financial, technical, and health care fields have much larger premiums than those who major in the humanities, social sciences, education, and, somewhat surprisingly, the natural sciences.

Chart 3. Wage Premiums for Four-Year and Advanced Degrees in Selected Majors

Chart 3

Yet another consideration is the school one attends. While the choice of school is not generally as important as the choice of major, there is still considerable difference in earnings between colleges. As Kevin Carey wrote in the New York Times after reviewing the federal government’s new College Scorecard, “students who enroll in wealthy, elite colleges earn more than those who do not.” Private school graduates earn more than public university graduates, and schools with high admissions standards, both public and private, also fare better. 

(There are some anomalies, however: graduates of some private liberal arts colleges with fairly high admissions standards, such as Bennington College and Bard College, fare as poorly as bottom-tier public schools.)

When you add all these factors up, a new picture develops that belies the perception of college being a panacea for all aspirants to financial success. It is beyond the scope of this article to derive precise numbers, but it is obvious that when you remove the differences for advanced degrees, majors, and schools, the premium can shrink quite rapidly. 

Furthermore, such considerations as the “break-even age,” when the benefits of going to college begin to outweigh the opportunity costs and debt repayment, would surely be affected by these factors. This San Francisco Federal Reserve Bank “letter” suggests that the break-even age for the average graduate is roughly 40 years old.

But for a bachelors degree holder from the wrong school and in the wrong field, the break-even age could be edging much closer to retirement than graduation. Or, at least, too old to save much for retirement, as money saved at age 35 will grow much larger than an equivalent sum saved at age 55. Furthermore, the break-even age most likely forces many young people to postpone important life decisions such as marriage, home ownership, and having children. According to the Gallup-Purdue Index 2015 Report, a survey of recent college graduates:

Nearly half of recent graduates who incurred any amount of student loan debt have postponed further training or postgraduate education because of their student loans. A third or more have delayed purchasing a house or a car because of their debt, and nearly one in five have put off starting their own business. Each of these figures rises significantly among those with a debt burden of $25,001 or higher.

The Gallup-Purdue report stated that only 38 percent of alumni that graduated between the year 2006 and 2015 thought they had a financially valuable college education.

Add in the generational differences and the possibility of dropping out, and, unless one is among the top students who are likely to go to top schools, take the toughest majors, or get advanced degrees, the expected premium seems at best small and precarious. Realization of this—by watching older friends and siblings struggle through debt and low wages after making a stab at college when they really weren’t academically inclined—may have a lot to do with the stagnating enrollments across the country and in North Carolina.

Enrollment growth in the University of North Carolina system stalled in 2009—the same year the Federal Reserve Bank’s college premium flattened out in many charts. In five years from 2009 to 2014, UNC undergraduate enrollment increased only by roughly 1,600 students—less than one percent. And this was in North Carolina, where there has been an approximately 10 percent increase in high school graduates in the same period, largely due to a substantial in-migration from other states.

Nationally, there has been the same sort of slow growth or decline in enrollment across all sectors of higher education. This is occurring even as the refrain about the college premium is pounded into young people’s heads from all sectors of the establishment. 

In 2013, the UNC system, under Spellings predecessor Tom Ross, produced a new strategic planned that gave number one priority to increasing the state’s percentage of college graduates. But it appears that the state’s residents are wisely “voting with their feet” and rejecting the rhetoric to go to college at all costs. Let us hope Spellings quickly realizes the false promise of such a project and focuses on the number two priority: improving quality.