FedUpUSA

St. Louis Fed Spills The Beans On College

college-student-debt

Oh now they’ve gone and done it….

If the benefits to education appear to be so high, why don’t more people seek a college degree? Some possible factors explored here include higher tuition costs, changes in assistance programs, fear of failure, earnings risk, and the recent recession and financial crisis.

What follows are pretty charts that show that college degree-holders earn more than not.  But they also show that in the last 25 years college-degree holders have seen their “median incomes” remain mostly flat while those without have seen them precipitously decline.

So why wouldn’t everyone go to college?  Well, as it turns out, it’s a hell of a gamble and the odds suck pretty badly.  Here you go:

According to a 2009 study by economists John Bound, Michael Lovenheim, and Sarah Turner, college failure rates are close to 50 percent at four-year public colleges. In addition, as the rate of college enrollment has increased, completion rates have decreased. Generally, students who drop out of college tend to do so after two years, and the costs of failure can be very high. With the two years of tuition expenses and forgone earnings, college dropouts may see no return on their investment. Also, many dropouts fail to earn any skill premium because most specialized learning takes place in the later years of college. Therefore, failure risk warrants consideration and may be a prime reason many students choose not to attend college.

No, really?!  Yeah, if you start and don’t finish, and get no skill premium in the process, then every dime spent is wasted.

But it gets worse:

Even with a college degree, there is no guarantee regarding future earnings or employment. Attending college may or may not pay off as planned. A May 2011 New York Times article by Catherine Rampell reported that in 2009 slightly over half of college graduates under the age of 25 held jobs requiring a college degree. Moreover, 22 percent of this same group was not working at all, and the remaining 22 percent was underemployed, meaning they held jobs below their skill level.

Ugh.

Note that in statistics risks such as this are cumulative.

If you elect to go to college there is only a one in four chance that (1) you will finish and (2) you will work in a job that actually renumerates you for having done so.

In other words there is a three in four chance that you’d be better off not having gone to college at all, because (1) your earnings power is not enhanced by having attended and (2) you wouldn’t have the debt — or spent the funds — to go.

What this paper actually appears to argue is that a huge percentage — three in four — of people who go to college shouldn’t, because they don’t get economic benefit from doing so.  That the outcome for someone who doesn’t have a college degree is on-balance worse than for someone who does isn’t the question.  We know that to be true and it’s always been true.  The question is what are the money odds of going to school in improvement of your life.  That’s all that matters; potential outcome is immaterial if you don’t achieve it just as is the fact that you can win the lottery does not mean that, on a money odds basis, you should buy a ticket!

As such if you’re contemplating as a young person whether or not to go to college the decision point isn’t whether you will earn more money with a degree than not.  You will; that is a known factor.

Instead you need to make an honest personal assessment of both the odds you will complete the course of study you undertake and the odds of finding employment that uses that course of study and degree to enhance your earnings power.

If you do not, at the end of that honest assessment, conclude that you are much more likely to succeed in both completing your course of studyand find a job that uses the knowledge gained to enhance your earnings power than not you are taking a gamble that in fact has a three in four chance of financially harming you rather than enhancing your life.  

If you take on debt — that is, leverage — to go to school and lose this gamble you will be financially decimated.

It is these statistical facts that lead me to my bottom-line recommendation when it comes to college: If you want to go and honestly believe youwill succeed in doing so then I believe you should pursue it — provided you take no debt in doing so.

The reason is that if you fail for either of the above reasons despite your belief that you will succeed you will have lost only previously-accumulated and earned capital and will not be reduced to debt peonage.

The bottom line: DO NOT TAKE ON DEBT TO GO TO COLLEGE.

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