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September 05, 2014 at 10:56 AM
While financial advisors know that investing in equities has delivered an average rate of return of around 6.5% above inflation over the past century, they also understand that not every stock investor has realized those results.
Perhaps that well-understood divergence will help advisors appreciate another kind of investment with high average returns but disparate impacts on investors.
That investment is a college education, and a new study by researchers at the Federal Reserve Bank of New York, offers a nuanced view of the economic value of such an undertaking.
Going to college has become something of a hallowed and highly anticipated experience for young Americans, and debate over the value of a degree and the fortunes of the millennial generation has grown in intensity.
Analysts at PIMCO recently offered assurances that a degree is valuable and that millennials’ financial position will improve, which will in turn trigger pent-up demand for housing and housing-related assets that have been slow to recover following the real estate bust.
In contrast, PIMCO rival Jeffrey Gundlach of DoubleLine Capital has argued that the economy generally and housing particularly face structural headwinds that won’t be aided by the declining fortunes of millennials. “The kids aren’t all right,” he has warned.
Enter the New York Fed’s Jaison Abel and Richard Deitz. In their four-part series on the economics of a college degree, the duo acknowledge the headlines that make this issue so salient today.
Tuition costs have been rising faster than inflation, student deb is mounting, wages for college graduates are falling, and job prospects for graduates are weakening.
At the same time, the data show that the economic worth of a bachelor’s degree is near its all-time high of around $300,000, and the time required to recoup the costs of a degree — currently about 10 years — remains near its all-time low.
The reason they suggest for the degree’s high value? “The wages of high school graduates have also been falling,” thus maintaining the relative strength of the college wage premium.
However, Abel and Deitz keep their microscope on the data to examine another factor that is degrading the value of college for many millennials: namely, the extra time they spend at college beyond the four years assumed in the data adduced above.
They find that the worth of a bachelor’s degree declines considerably for those making college their home for five or six years.
It’s not merely, or mainly, the extra tuition and fees, which add on average net costs of about $6,500 a year. Rather, it is primarily the forgone earnings and the forgone experience that follows a late-graduating student throughout his lifetime.
“All in all,” the Fed duo find, “an extra year of staying in school costs more than $85,000, and for those who take two extra years to finish, it costs about $174,000.” On a net present value basis, using a 5% discount rate, each extra year in college subtracts $65,000 from a student’s lifetime earnings.
