Is a College Education Worthwhile?

Is a College Education Worthwhile? Melanie Doychak Aniqa Feerasta Mathew Hoff Kelly North Marcus Phelps Computer Skills for Economic Analysis Dr. Steven Myers University of Akron Fall 2008 Abstract: This research finds the value of a college degree and depicts the difference between achieving a college education and choosing not to pursue one. We based the research off of the question, Is College Worth While? Over a period of 47 years we compared and contrasted the present value income for males and females receiving a high school diploma and immediately entering the work force; and male and female college graduates entering the work force. We used both male and female statistics in order to depict major differences in wage by gender. The calculations support the decision to pursue a college degree from a financial perspective for both sexes. College graduates are also more beneficial to the economy due to higher education. The findings also support pursuing a graduate degree after undergraduate studies. Through the calculations and research, obtaining a college degree is far better than not attending at all. 1

Introduction The value of a college education is a popular topic of discussion in the United States. As the Southwestern Learning Economics Resource Center explains, One of the questions asked every year by many college students and their parents is: is a college education a good investment? Given the sizable amount of time and money invested in a college degree, this study examines the expected present value of lifetime earnings for male and female college graduates as compared to their high school educated counterparts. Discount Rates and Income Growth Rates After looking at numerous sources, we decided on three separate growth rates for high school income, two separate rates for college income, and a discount rate that would more or less reflect the inflation rate. We began by looking at data from the U.S. Department of Education. Since we wanted to focus our study on both men and women, we needed the separate starting salaries for each gender. That source gave us the base starting salaries for men and women for both high school and college graduates. From there, we needed to agree on growth rates in which these incomes would rise. Before we decided on income growth rates, we needed to determine a discount rate suitable for our study. After looking at inflation rates over the past 50 years, especially paying attention to current economic conditions, we decided that a discount rate of 3.5% would be suitable. With regard to our high school growth rates, we knew that the rate had to be higher than inflation, but not so high that it would be unreasonable. The initial 10 years of working, we concluded that a high school graduate s income level would grow steadily at 3.65%. We also took into consideration the type of job that a high school graduate may hold and how such a career would compensate the individual. We thought about the fact that after 10 years of work at a manual labor or general high school graduate level job, the employee would most likely receive ten-year pay. This pay would be somewhat of a bonus for working that period of time. Therefore, for the next 14 years, we concluded that a high school graduate s income would grow at 4%. By age 42, we recognized that income may not increase at this higher rate. Therefore, for the remaining working years of their life (until 65), we dropped the growth rate back down to 3.7%. For our growth rate data, we referenced the College Board s report on, The Benefits of Higher Education. Here we were able to piece together different information that would help us determine the growth rates. For our college growth rates we noticed that, by age 33, the 2

typical college graduate who enrolled at 18 has earned enough compensation for college tuition and fees (2007). Since we already determined our high school growth rates, we needed to base our college graduate s income growth rate off of our study. We calculated the growth so that when the person turns 33, their cumulative difference of high school and college income levels cross over. In this year, the college student is finally compensated for the tuition and lack of income in their years during college. This is seen more clearly in Figure 1 below. Figure 1 depicts the cumulative differences of income 1 Female Male The rate to achieve this crossover point for the first 11 years is 4.3%. After 25 years of working, we assumed the growth rate level of income would decrease back down to 4% for the remaining working years. Present Value of Net Income The present value of net income for female college graduates over a forty seven year working lifetime is $2,006,663.17. This figure is lower than the present value of $2,467,423.50 for male college graduates. Like their college educated counterparts, the present value of net earnings of male high school graduates is greater than for females. Male high school graduates will earn $1,716,859.50 while females will earn $1,359,273.77. Male high school graduates will earn 26% more than females over their lifetime while male college graduates will earn 23% more than females. 1 Data used for calculation and graphs acquired from the U.S. Department of Education, National Center for Education Statistics. 3

College Worth Based on Present Value of Cumulative Earnings Based on the present value of net cumulative earnings, a college education is a worthwhile investment for both men and women. Due to the gender wage gap, however, a college education is more valuable for males. A male college graduate s lifetime earnings exceed those of a high school graduate by $750,564.39, or 42%. A female college graduate s lifetime earnings exceed those of high school graduate by $690,116.64, or 46%. Figure 2 depicts lifetime earnings by gender and education Other Considerations Besides the financial standpoint, we can also consider other reasons as to why it is better for students to attend college. Using cost-benefit analysis is one way to see how a person decides whether or not to pursue college. Through cost-benefit analysis the person must field all implicit and explicit costs of choosing to attend college. The cost of attending college would be: paying off loans from school, attending college instead of earning money, time commitment to school that could be allocated elsewhere; and several other costs that could be added. Benefits from attending college is: better careers when graduated, unique educational opportunities, ability to impact the community in positive ways; becoming more successful; and many more benefits that are too numerous to name. From this analysis, the benefits of attending college can potentially be greater than the cost of not attending depending upon the person. 4

Viewing other economic concepts like social-interest and self-interest shows that people are better off attending college instead of choosing not to attend. Social interest decisions are made to better society as a whole; while self interests are decisions made to better ones-self. The social benefits from receiving a college degree is that graduates are more open minded and accepting of other cultures, more rational, and contributes more to the economy through greater productivity in the workplace. Self interests for college graduates are: the ability to live a better quality of life for themselves and children, attain professional and personal mobility in chosen career field and greater job retention and security (Porter, 2003). There are a few ways in which students decide to attend college after high school or choose to immediately pursue a career in full-time employment. The cost of college may seem frightening in the short-run, but in the long-run, college provides graduates with more opportunities and greater flexibility in job selection than with just receiving a high school diploma alone. Pursuing a Masters Degree We chose a two-year average time period for graduate school; because the length of this degree varies on the chosen field and/or school you attend. The cost of attending graduate school is $40,000 for an undergraduate degree, and $26,000 for a Master s Degree. A student attending graduate school increases their opportunity cost not only by $26,000 tuition fee, but the cost of what they could be making full time with their Bachelor s degree, which is $43,002.77 and $43,545.53 for the first two years, respectively. Therefore the total opportunity cost of obtaining a masters degree would be $112,548.30. The income increases from earning a Bachelor s Degree are a clear indication of the worth of college; the benefits of earning a Master s Degree, however, are not as large. Based on our data, the cumulative present value of income for a Master s is only about a $300,000 increase. Students looking for a substantial increase in pay should therefore give consideration to what degree they will earn. Some degrees, such as law and medicine, provide a payoff doubling the income they would receive from just an undergraduate degree (Kim, 2008). For other degrees, the payoffs are not nearly as high. Other factors, then, must influence the decision to earn a Master s degree. Discussed above are some factors influencing the decision to go to college, other than costs: self-interests, quality of life, etc. These factors may be even more important when deciding on whether a continued education would be worthwhile, since the payoffs are not as large as attending an undergraduate college out of high school. The graph 5

below shows the present value of income of a graduate degree compare only high school and college degrees. Figure 3 depicts the cumulative present value of income with high school, college and graduate degrees. Cumulate PV of Income $3,000,000.00 $2,500,000.00 Cumulative Income $2,000,000.00 $1,500,000.00 $1,000,000.00 $500,000.00 $- $(500,000.00) Age Cum. PV of Graduate Cum. PV of College Cum. PV of H.S. Conclusion Based on previous observations and calculations, we can answer the question, Is a College Worthwhile? We have calculated the present value of a college education in comparison to those with only a high school education in the workforce. To find these numbers we figured in a projected inflation rate which was based on rates from past years. From the research, college graduates earn a substantial amount more through receiving a bachelor s degree. College graduates are projected to earn at least $2,000,000, while high school graduates figure to earn about $1,350,000 in a lifetime. Both of these figures may seem substantial, but those with a degree will more likely save and retain their money longer. It is to say that females make far less than men do with or with no college education. Women are not receiving an equal share in wages when males are making 23% more than females. Also, those receiving a graduate degree accumulate even greater salaries, because of their higher education level. From the data and research, it is proven that college is worthwhile. 6

References Baum, Sandy. Ma, Jennifer. 2007. Education Pays, The Benefits of Higher Education for Individuals and Society. The College Board. http://www.collegeboard.com/prod_downloads/about/news_info/trends/ed_pays_200 7.pdf Clark, Kim. 2008. The Grad School Payoff. U.S. News and World Report. March 21. http://www.usnews.com/articles/business/paying-for-graduateschool/2008/03/21/the-grad-school-payoff.html Earn My Degree.com. Average Annual Earnings for College Graduates and Non-Graduates. http://www.earnmydegree.com/online-education/learning-center/educationvalue.html Inflation Rate In Percent For Jan 2000-Present. InflationData.com. http://www.inflationdata.com/inflation/inflation_rate/currentinflation.asp Porter, Kathleen. "The Value of a College Degree." ERIC-HE Digest Series (2003): 1-3. U.S. Department of Education, National Center for Education Statistics. (2007). The Condition of Education 2007 (NCES 2007 064), Indicator 20. http://nces.ed.gov/fastfacts/display.asp?id=77 U.S. Department of Education, National Center for Education Statistics. (2007). Average graduate and first-professional tuition and required fees in degree-granting institutions: 1987 88 through 2005 06, Table 322. http://nces.ed.gov/programs/digest/d06/tables/dt06_322. 7