College Is Worth the Rising Costs: NY Fed
A New York Fed report shows that a college education delivers a higher rate of return than stocks or bonds.
Despite the rising costs and growing debt burden, a college education is well worth the money, according to a new report from the Federal Reserve Bank of New York.
The typical college graduate earns a premium of well over $30,000 a year compared to the average worker with only a high school degree over his or her working life, according to the report. A college grad will earn $78,000 compared to just $45,000 for the average high school graduate.
But the typical college grad and his family, unlike the high school graduate, has to pay for college, often taking on thousands of dollars’ worth of debt. The average graduate leaves college about $30,000 in debt.
With that in mind, the New York researchers, Jaison Abel and Richard Deitz, weighed the upfront costs of college against a lifetime of benefits, calculating an internal rate of return, but using “back of the envelope” estimates due the complexities involved.
They found the IRR of a bachelor’s degree earned in four years is 14% currently, down from a record 16% in in the 1990s because of rising costs, but up from 8% to 9% in the 1970s and 1980s. That current rate of return easily exceeds the return on stocks and bonds, which the Fed researchers tag at 7% and 3%, respectively.
“While the rising cost of college has eroded the return to a bachelor’s degree to some extent, our analysis suggests that college remains a good investment, at least for most people.” The return on investment declines significantly, however, if a student doesn’t earn a degree in four years.
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