Is college still worth it?

Big-picture data still show that earning a college degree begets higher wages. But researchers who’ve scratched beneath the surface of aggregated data are finding crucial nuances and qualifications to this conventional wisdom. On May 24, presenters at the St. Louis Fed’s Center for Household Financial Stability’s symposium, Is College Still Worth It?, highlighted some of the most important recent findings in this field. Presenters showed trends in how the college-degree premium relates to income and wealth; how family wealth and college completion interact; and how the data break down by gender, race, and ethnicity.

Susan Dynarski, University of Michigan, gave a direct answer to the symposium’s titular question: Yes, a college degree is still worth it, with an average 11 percent annual rate of return for income. Since the 1970s, the earnings premium for workers age 25 to 34 widened (see the figure below). For men, the increase was primarily due to decreases in inflation-adjusted earnings for workers without a college degree, while earnings remained relatively level for college-degree holders.

Earnings by education

Median earnings ($2015), full-time year-round, ages 25 to 34

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Dynarski offered an important caveat: the payoff to a college degree depends on completing a degree program. “The most expensive education is the one you don’t complete,” she said. College completion rates differ by college type, with lower rates for private for-profit institutions and higher completion rates for public and private nonprofit institutions. For students who don’t complete their degrees and have student loans to pay, attending college was probably not worth it.

Presenters also explained new work examining the impact a student’s family’s income can have on the likelihood of the student increasing his or her educational attainment. While the positive relationship between family income and a child’s eventual education level is well documented, Bradley Hardy, American University, looked closer at the relationship between incidences of poverty during adolescence and education outcomes. Using the Panel Study of Income Dynamics, Hardy showed that poverty^* in the year near high school graduation is associated with lower likelihoods of graduating from high school, attending college, or persisting in college. In addition, higher levels of income volatility are negatively associated with high school graduation rates, while fewer residential moves and more years residing in a married family are associated with gains in education attainment.

In addition to income, parental wealth is also associated with education outcomes. Fabian Pfeffer, University of Michigan, noted that education is one of the key mediators of wealth transfer between generations, with more than twice as large of a contribution than direct monetary or asset transfers. Pfeffer also presented evidence that gaps in college persistence by wealth have grown between those born in the 1970s and 1980s.

William Emmons, lead economist at the Center for Household Financial Stability, showed that once data on race, ethnicity, birth year, and family size are included in the analysis, the income premiums for college and post-graduate degrees are overall smaller and generally shrinking from the 1930s to the 1980s. Meanwhile, for the cohort born in the 1980s, the wealth premium for white families is substantially lower and for non-white families is eliminated. The analysis is based on data from the Federal Reserve Board’s Survey of Consumer Finances.

Emmons cited three plausible explanations for the reduced wealth premium. First, because asset valuations vary over time, wealth accumulation is affected by when you are born. It turns out that being born in the 1980s is consistent with lower returns, particularly when making investments in 1999, 2003–2007, and 2013–2018 compared with prior years. Second, from the 1930s to the 1980s, each decennial cohort with a college degree has borrowed more than the previous cohort. Increased debt levels reduce net wealth on household balance sheets. Third, college tuition and fees have increased more than three times as fast as overall prices since 1975.

View presentation videos and slides on the symposium web page.

*About $25,000 income for a family of four.