More young Americans are enrolling in college than ever before. In 2017 there were approximately 16.8 million undergraduates enrolled at 4-year, degree granting colleges and universities; an increase of 27% from 2000 when there were 13.1 million enrollees. Even after adjusting for population growth the proportion of Americans pursuing higher education has increased by 10% over this period.
Conventional wisdom holds that this is a great achievement! Research has shown that a college degree is associated with higher incomes and wealth as well as better health and more stable marriages. American universities remain the dominant force behind innovation around the world and continue to draw record numbers of students year after year.
How do we reconcile these commonly held beliefs with news about the ever-rising costs of education and the attendant explosion of student debt? What of the anecdotes from friends and family of recent graduates unable to land a job in their field? Or settling for positions for which they overqualified?
The big question on people’s minds: is college still worth it? A recent study from authors William Emmons, Ana Kent, and Lowell Ricketts at the Federal Reserve of St. Louis examines this question and uncovers some striking findings on how college wage and wealth premiums have changed over time.
The Difference Between Income and Wealth
For clarity, let’s quickly discuss the difference between income and wealth. While certainly related, the key distinction is that income is a flow variable while wealth is a stock variable. You earn income every year from your job, investments, gigs and hustles; income is a reoccurring, year after year measure and is generally associated with employment. Your wealth is the value of your assets (house, stocks, bonds, etc.) minus your debt (mortgage, credit cards, student loans(!)) and has nothing to do with the money you make at your job. You could conceivably have a very high income and very little wealth if you spend it all on cars and vacations. Conversely, you might have very low income and tremendous wealth if you invested your money early, but have since opted to live out of a camper as you pursue your calling as a wildlife photographer.
The College Income and Wealth Premium
The authors of the study begin with an examination of the college income and wealth premiums in aggregate. If we simply pool all persons with a bachelor’s or post-graduate degree and compare their income and wealth against those with only a high school diploma then the numbers look very encouraging.
As the graphs from the study shown below demonstrate, the income for a family in 2016 with at least one bachelor’s degree holder in the house was approximately 100% higher than a family without degree. Even more extreme is the income for a family where at least one member holds a post-graduate degree (i.e. master’s or Ph.D). In this case, income is around 175% higher than a comparable family without a college degree!
More striking yet are the statistics presented on wealth. On average, a family with a bachelor’s degree has 300% more wealth than a nongraduate family. A family with a post-graduate degree has over 700% more wealth!
These are impressive figures and at first glance appear to confirm our priors on whether a college degree is worth it: emphatically yes!
And yet there is significantly more to the story that these figures hide. Looking at aggregate figures can often be misleading. The authors proceed to demonstrate that while the college income premium has remained durable, the wealth premium has all but disappeared for the majority of Americans.
The Great Disappearing Wealth Premium
The author’s interest is in how the income and wealth premiums have changed over time. To do this they break down the population into six distinct cohorts (i.e. groups) based on birth year with each spanning a decade from 1930 through 1980. Furthermore, they break down each cohort by race and ethnicity to determine if there are differences in the trends among demographic groups.
The graphs below show the change in the college income premium for black and white Americans for each cohort. Focus on the dots in each graph and how they have changed over time (disregard the little lines extending from each dot). Each dot represents the average income premium for each cohort. For example, in the first graph for white Americans, the dot for the 1960 cohort is around 55%. This means that the income for someone born in the 1960’s and holds a bachelor’s degree is about 55% higher than someone also born in 60’s but who does not hold a degree.
For both white and black Americans the college income premium has declined relative to its peak in the 1930’s but has otherwise held more or less stable over time. It’s clear that those with a bachelor’s degree still enjoy a healthy premium compared to those without.
The picture is quite different when we examine how the wealth premium has changed over time. The graphs below depict the wealth premium broken down by cohort and demographic group.
For both black and white Americans we observe significant erosion in the wealth premium across cohort groups. Black Americans born in the 1930’s with a bachelor’s degree had a wealth premium of around 500% compared to the non-degree holder. Today, that premium has essentially vanished . For someone born in the 70’s or 80’s there is essentially no difference in wealth between a degree holder and a non-degree holder. The case for white Americans isn’t quite as extreme, but still, we observe that the premium has decreased from over 200% to about 25% over this period.
It is important to point out that these figures are not a statistical artifact of age. The figures have been corrected for age to account for the fact that people tend to accumulate wealth later in life. Rather, the figures show a utter collapse in the wealth premium across different generations. While the Greatest Generation and Boomers were able to capitalize on tremendous growth in the economy and the value of their investments, Gen X’ers (and increasingly Millennials) face a much different world today. Consequently, their capacity to build wealth depends on much more than the degree they hold (or don’t hold).
How Did This Happen?
The author’s offer a couple of reasons for why the wealth premium has disappeared. Key among these are the skyrocketing cost of education and increased availability of debt. Developing a financial acumen is not among the intrinsic benefits of a college degree, but rather a skill that takes time and experience. Most undergraduates enter school at 18 or 19 with very little understanding of their finances. They have been told that college is a good investment that also includes epic parties. After a 20 minute “education” on federal student loans through FAFSA, they are permitted to take out tens of thousands (and in some cases hundreds of thousands) in debt which will accrue interest as they go through school. Additionally, the increased availability of credit cards and general access to financial products has made it easier to accrue yet more debt without even having a job.
These forces put students in a difficult starting position. It’s not clear (at all) that students have been adequately shown that college is a serious endeavor and not a guarantee of anything. College continues to be billed as a requisite for any kind of meaningful life and prospective students will struggle to find a counter opinion.
There is quite a bit more to this study and I encourage you to check it out using the link at the bottom of the post. You can probably skip the parts on methodology if you’re unfamiliar and focus on the results and conclusions. The key takeaway is that the calculus of going to college is changing and has been changing for some time. In truth, college might not be a worthwhile investment; especially when you consider the degree chosen and available careers paths.
We will probably come back to this topic more than once, but for now I hope that it has given you some food for thought.
Thanks for reading!
Aric Light
Links and Sources
Is college still worth it? The new calculus of falling returns. – Williams Emmons, Ana Kent, Lowell Ricketts
