New Evidence That College is a Risky Investment
January 10, 2011, 6:01 pm
By Richard Vedder
Many published studies argue that higher education as a private investment yields a high rate of return—10 percent is a commonly cited figure. It is argued that you can do much better investing in higher education than in, say, real estate, stocks, or bonds. I have always been very skeptical of these studies, and two new papers support my view.
I have been saying for years that there is a huge risk that new college entrants will drop out, and that published academic studies usually implicitly look at those who graduate, ignoring a roughly equal number who fail to graduate from college in a timely manner. That is the huge flaw in the Does College Pay? studies annually produced by Sandy Baum for the College Board.
Now two studies, both presented at the American Economic Association meetings in Denver last week, make the same point. In “College Risk and Return,” Gonzalo Castex suggests a large part of the extraordinary (above normal) returns of college are explainable by the compensation needed for risk-averse persons to take the risks of going to college—the risk they might not make it through. Roughly the same thing is argued, albeit a bit differently, by Kartik Athreya and Janice Eberly in “The Education Risk Premium.”
When the return on something is high, investors flock to it, eventually reducing the return to a more “normal” return. Thus when Apple seemed to be making millions of new profits from the hugely popular iPad, dozens of imitators appeared with tablet devices—within months. But seemingly that phenomenon has not happened in higher education—enrollments have risen, but rather sluggishly, and not enough, it would seem, to increase the supply of college graduates enough to depress their average wage and thus the return on college investments.
The reason is that in some risk-adjusted sense, the return to higher education is NOT that unusually high, since the risks associated with “buying” an education are actually greater than buying, say, stock in Procter & Gamble: The probability of essentially losing the investment (by failure to graduate) is greater in higher education than in blue-chip stocks or certainly bonds.
Other evidence suggests that we may be entering an age where the risk-adjusted return on higher education, actually near that of other investments in the past, may be falling below the gains from these alternative opportunities. Tuition fees continue to rise sharply relative to the incomes of college graduates. More college graduates are takinglow-paying jobs, say as waiters or cashiers in stores.
As former Spellings Commission chair Charles Miller reminded me the other day, if we reduce the price of higher education through productivity-enhancing changes in higher education, the rate of return will rise. Lower-than-normal returns in higher education can be remedied two ways: by reducing costs (and thus the size of the investment) or by increasing the wage premium associated with college by restricting the supply of growth of new college graduates. Or both.
RESPONSES:
Some of the 13 Responses to New Evidence That College is a Risky Investment
So, the inference here is that attending a community college for one’s first two years, gruaduating and going on also to complete a B.S or B.A, would be a good investment? Further supporting the community college investment strategy is that for those who do not complete a degree, tens of thousands of dollars would not be left on the table. Gee! Where have I heard this before… Maybe when I did it 36 years ago and also from the tens of thousands of others who’ve made the same savvy investment. Only if I had made a large purchase of apple stock at $8 a share (which I couldn’t have afforded but I could afford a community college education) and sold it today could I have done nearly as well.
The problem here is in the assumption that a college degree is a business investment. If the main purpose of college is to get a job, we can easily bypass college and get right to the sweat shop, or the privileged positions awaiting us thanks to wealthy parents.
My evidence is anecdotal but I have to agree that going to college and obtaining higher and higher degrees is a risky proposition. First, we all know that comparatively few people are employed in their field of study while at college. In any event, based on many articles in the Chronicle and other publications, point to the fact that the initial elation and satisfaction of getting a degree rapidly dissolves when the graduate starts looking for a job in his/her field of choice. Even those who get a job soon find that what they learned at college is not that useful and it often results in disillusion, job failure and dismissal.
It is a shame that the idea of apprenticeship in this country has fallen by the wayside. However, in Great Britain and other Commonwealth countries the apprentice idea still lives under the name of “articled clerks” in accounting and law firms. The articled clerk signs a contract, known as “articles of clerkship”, committing this person to a fixed period of employment. The other party to the contract, the principal, undertakes during this period to provide training and relevant experience in the practice.
Other countries like Austria and Germany have a dual education system for non-professional training, i.e., company-based training of apprentices complemented by compulsory attendance at a part-time vocational school for apprentices (Berufsschule). France has a similar system called centres de formation d’apprentis, CFAs). These schools first appeared in 1961, and in 1971 apprenticeships were legally made part of professional training. On completion the participants get various types of diplomas depending on their training like, brevet professionnel (certificate of vocational aptitude), the bac professionnel (vocational baccalaureate diploma), the brevet de technicien supérieur(advanced technician’s certificate), engineering diplomas, masters degree and others. France grants tax relief to companies that agree to take on apprentices.
We do have apprentice and intern programs of various types in the US but generally, these are not formalized, imbedded or tied to the technical or industrial systems or to the professions, with the exception of medicine and engineering. Clearly, we need to have a formal, regulated and more expanded apprentice system for the vocations and the professions in the U.S. in order to be a more productive and competitive nation. It seems incredible to me that for the most part, we expect teachers, historians, social workers, lawyers etc., etc. to instantly perform their jobs based on theoretical knowledge and little or no practice. It is no wonder that so many people drown in our swim or sink system.
Good point, Richard. There’s also another investment that I’ve always suspected of a weak ROI. Nursing homes. It’s an economic travesty to dump thousands upon thousands of dollars keeping all these old people alive. And what do you get at the end–a dead person.
Some of these comments are off the mark. I see billboards every day in Denver for one college or another pleading with potential consumers to “invest in their education.”
In my CT classes at a lower-tier HBCU, nearly all of the students state getting a better job as their main reason for college. Most of them also assume that if they do C-D-level work and get their degree, a high-paying job will be waiting for them, for two reasons. First, like many other students, they’ve been told over and over again that a college degree — just getting the degree — assures them a better life. Second, they’ve never examined, nor have they been told to examine, that claim and any evidence that might be adduced to support it.
Early in the semester, after leading them through a means-ends reasoning exercise bearing on their goal of getting a job which will (in their view) mean a good life, I make two points to them.
First: the jobs they are supposedly preparing themselves for demand not a college degree so much as the well-developed skills, competencies, habits, and attitudes that degree is assumed to betoken. Most of the students I come across lack them. If they lack those traits — and many of our students, focused on getting the degree do not develop them — they will not be offered a decent job, or will not keep it long.
Second: they will have to compete for those jobs with students who are well-prepared by college for the world world. Not only will they have to compete with students who attended higher-tier schools in the US (pedigree does matter), and with students in lower-tier schools who developed and possess the required traits, they will also face foreign competition for the same jobs.
The implication should be fairly obvious: For students in non-elite schools, college is NOT a good investment if you simply graduate. College is a good investment ONLY if you gradate AND have worked hard consistently in college to develop the skills, habits, etc. employers are asking for. Unfortunately, many students manage to get their degrees without developing those traits, setting them up for later failure in the workplace unless they acquire them on the job.
“Tuition fees continue to rise sharply relative to the incomes of college graduates. More college graduates are taking low-paying jobs, say as waiters or cashiers in stores.”
The high cost of other necessities, like healthcare and housing (including rentals and despite the deflation of the housing bubble), are likewise pricing people out of the market, including most people who DO have incomes that reflect an education premium.
The statistics on this are clear–it’s not just that too many college graduates are working in jobs that do not require a college education. Most of the population’s earnings are depressed through the processes of deindustrialization and global labor arbitrage.
Richard Vedder’s commitment to devaluing higher education always leads to the same conclusion — no matter what the evidence.
The comparison of investment in higher education (one’s own human capital) vs. investment in stocks, bonds, or real estate (also capital investments) is inappropriate.
I can research stocks and bonds and real estate products and try to choose the ones that have the best rates of return (given my tolerance for risk), but ultimately I can’t control the market for those investments and my ultimate return. Think about all the low risk investments that were hammered in the Great Recession.
In contrast I have a much higher degree of control in the risk related to my investment in a college education. Although there are no guarantees on which occupations will pay well 10, 20 or 40 years from now, there are occupations where the odds of a high paying jobs are higher. I can reduce the risk of my degree not paying off by majoring in science, accounting, etc.
I can also reduce my risk-adjusted rate of return on my college education through the decisions I make regarding how much studying I do. The likelihood that I will graduate and get a good job offer are related to my GPA at graduation. I can control that.
The likelihood that I will have the financial means to complete college (and get a good job) are also mostly in my hands. If I work hard in high school and college, I can increase the likelihood of getting merit-based financial aid. If I am the child of wealthy parents, I also don’t have financial worries about completing my degree. If I choose to go to a lower priced public university, the likelihood of me not finishing for financial reasons are lower. If I serve in the military and get GI Bill benefits or work hard to be accepted into a ROTC program — again the odds of me not finishing for financial reasons are lower.
Richard Vedder’s *sweeping* statements about the low payoff for investments in higher education should be disregarded because they just don’t fit the facts.
Here’s my question about this broad brush approach to valuing a college degree: it treats all people considering college to have the same risk, but really can’t we do much better than that? I think gbsadler (above) is on the right track: college isn’t so much “risky” as just a mistake for many students without the preparation or inclination to work for it. For other students with strong backgrounds (high school, job experience, etc), college is an excellent choice because they are very likely to graduate and do well. A proper study would use student background in relation to the actual cost of college as a proxy for riskiness. Also, the analogy between iPad mimics and colleges is way off: it’s a lot easier to produce a new design for a smartphone using existing resources than to start a new college or make a major expansion on an existing campus.
