The Return on investing in a College Education

The article titled "The Return on Investing in a College Education" from the St. Louis Federal Reserve discusses the economic value of higher education by comparing its costs and benefits. The author, Guillaume Vandenbroucke, an economist and assistant vice president at the Federal Reserve Bank of St. Louis, focuses on the economic aspect, ignoring other reasons for pursuing or avoiding college education.

Key points from the article include:

1. **Costs of Higher Education**: The cost of higher education has risen sharply over the last few decades. For each dollar of tuition paid in 1980, one had to pay $3.70 in 2000 and $8.30 in 2020. This indicates that the cost of tuition grew more quickly than inflation.

2. **Benefits of Higher Education**: The pecuniary benefit of higher education is the sequence of earnings one receives throughout a lifetime of work above the earnings that one would have received without higher education. In 1980, college-educated workers earned more than high school-educated workers, but the difference never exceeded $10,000. In 2000 and 2020, however, the earnings difference was noticeably higher than it was in 1980, even after adjusting for inflation.

3. **Return on Investing in a College Education**: The rate of return on a college education can be computed in the same way as the rate of return on an asset. On average, college-educated workers paid $13,996 (4 x $3,499) in 1980 to receive the extra income represented by the blue line in the figure above throughout the rest of their lives. If one sums up the extra income these workers received and adjusts for the time it took to get this income, the rate of return on the college tuition they paid is very large at 20.5%.

4. **Rates of Return across Time, Gender, and Race**: The rates of return on a college education for six demographic groups in 1980, 2000, and 2020 were calculated. Although the rates of return vary greatly across time, gender, and race, they are high relative to the returns one finds in financial markets. In all three years, the highest rates of return are for Asian men and Asian women. Black men and Black women have the lowest rates of return in two of the three years.

5. **Considerations Affecting the Estimated Rates of Return**: The calculation described above abstracts considerations that may affect the estimated rates of return on a college education. These considerations include a selection issue, an employment issue, a mortality issue, and a nonpecuniary benefits issue.

The author concludes that education has a return in essentially the same way any asset does: There is an initial investment entitling the investor to a subsequent stream of income. Comparing higher education’s cost (in this case tuition, which is the initial investment) and its benefit (the higher incomes that college-educated workers earn) as if they were the price and payoff of a financial asset yields estimates of a return that appears to be quite high. Despite rising tuition over the years, college enrollment rates are still high because students and their families recognize that the payoff can be greater.