Wednesday, November 09, 2011

The Costs of College

I threw this together with the tentative plan of presenting the information to students at my former high school. As it turns out, I know very few of the teachers who still teach at said school, so I'm left with an essay in presentation form. Enjoy.

"There's no such thing as a free lunch."

This phrase has been popularly attributed to the economist Milton Friedman. Although he believed in the wisdom of the saying, he never claimed to have been the originator of it. Instead, he utilized it to illustrate an important economic concept. Every action costs something. Often this is denominated in dollar terms: a pop costs a dollar. Other times, the terms are different: the cost of writing this piece is reading a book. Economists refer to this as opportunity cost. It's a very good habit to account for this when contemplating any significant decision.

We'll come back to opportunity costs in a bit. For now, I'd like to talk briefly about the benefits of a college education. The primary benefit is that possession of a college degree increases the likelihood of employment; it also, on average, enhances earning potential, as college graduates can out bid non-graduates for preferred jobs. The latest numbers from the Bureau of Labor Statistics1 suggest an unemployment rate of 4.2% for American citizens with at least a bachelor's degree as compared with a rate of 9.7% for those who possess only a high school diploma. Other numbers, also from the BLS2, place take home pay at $1038 per week for college graduates as compared with $626 per week for those who have only completed high school. There are exceptions, of course: despite never completing college, many founders of businesses—Mark Zuckerberg, Bill Gates, etc.—obtain remuneration which far exceeds that of the average college graduate. Nonetheless, these general truths do hold.

This does not necessarily imply, however, that the college education is the cause of the benefits. This would be an example of the post hoc ergo propter hoc fallacy, Latin for: "after this, therefore because of this." Typically, the best and brightest high school students are encouraged to attend college; it should not surprise us if this same group has more success in the job market. This is not to say that college education has no influence on the employment prospects of graduates, only that this influence is not necessarily causal. Intelligent, hard-working people tend to succeed in relatively free societies such as ours.

As an aside, I should add that data gathered during our current recession suggests that the job picture has darkened, though this holds for both college graduates as well as those without college degrees. In many cases, the former are displacing the latter and squeezing them out of the labor market.

Since we haven't really proven that college education makes a difference, it's worth examining some of the reasons it might do so. To do this, we have to separate the two disparate functions of education: that of providing a classical liberal arts education, and that of providing training for a specific vocational function. The former was the traditional aim of all institutions of higher learning. So a student would learn Greek and Latin; he would read Virgil and Homer in the original, and provide his own translations. As our educational system began to let in more students, the emphasis on the classics faded. This is an important development for our civilization, but it's not terribly relevant here.

The second function of education, and, for all intents and purposes, the only aim of education today, is to provide training for employment in specific fields. I received a degree from Michigan Tech in Computer Engineering; so I received instruction in physics and math, circuits, software design, computer hardware, etc. Elementary education majors learn how to teach classes, accounting students learn how to keep books, and so on and so forth. Schools will still require a handful of general electives, but it's basically correct to say that modern universities are glorified trade schools.

Earlier, we looked at some statistics comparing college graduates to high school graduates. Yet when we see universities as trade schools, we should also see that lumping all college graduates together doesn't make a lot of sense. In economic terms, the BLS is aggregating dissimilar goods. The market is prepared to pay software developers different wages than teachers. This may or may not be just, but it is reality. So when one hears statistics that suggest that college graduates make more money, be sure to compare remuneration across degrees. When doing so, it's interesting to note that professions which pay well are thoroughly documented. Finding any sort of data on Women's Studies majors proves difficult, but implicitly tells us something about the wages such graduates command.

Even after we've accounted for varying fields of discipline, we need to account for the quality of the institution. Possessing a business degree from Harvard is going to be worth more than possessing a business degree from St. Cloud State—even if my brother refers to his alma mater as the Harvard of the Midwest. This isn't to say it's imperative to get into the best college; certainly Michigan Tech is a far cry from MIT, and yet I'm gainfully employed. But at the high-end, a degree generates some extra pull, and at the bottom end, that is, at the for profit colleges, the degrees may not even be worth the paper on which they are printed.

Returning to Friedman's admonition—"There is no such thing as a free lunch"—and examine the costs. First, and most obviously, there is a financial cost. Financial aid and scholarships are available, often depending on one's race and socioeconomic status; still, as the Huffington Post reported just over one year ago, "The average cost of a four-year, non-profit private college is $35,000, while cost for four-year public college comes in at just under $14,000."3 However, these numbers come from data comprising the 2007-2008 academic year. Tuition has increased since then; over the last ten years it has gone up at a rate of six percent annually. An online resource4 that assists students and parents in saving for college suggests that students can expect to pay $119,400 for a four year degree at a private college, as against $33,300 for students staying in state to attend a public university.

These figures do not include the cost of room and board, books, and other living expenses; these are not insignificant costs5. This also assume that the student will graduate in four years, a prospect that has become increasingly dubious for a variety of reasons, not least of which is the creative scheduling undertaken by colleges to ensure a steady stream of income. A staggeringly high 47% of students fail to graduate within six years.6

These numbers are vital because they help us gauge how much debt students must take on in order to obtain that important piece of paper. Even though college graduates do, on average, make more money than those who possess only a high school diploma, the former are awash in debt, while the latter should be able to stay relatively debt free. Moreover, not all college students work while attending class, but high school graduates have four or more years of accruing work experience and earnings. These years, coupled with student debt, constitute the chief opportunity cost of a college education today.

I'm going to run though a simple calculation to try to better quantify this cost. Again, numbers vary based on school, financial aid, degree, and so on, so it's best to run some of these calculations on your own, with your own numbers. Regardless, the exercise should prove worthwhile.

We'll say our hypothetical student took found a job making $1,038. But, because he was such an average student, he had $25,250 in debt upon graduating.7 The average debt for Minnesota students is actually higher8. Calculating an average interest rate is exceedingly tricky; there are a variety of different loans, with the rate on unsubsidized Stafford student loans coming down to 3.4% shortly, and private student loans carry a much higher rate. We'll use 7%, but this number may be too conservative.

CNN has a nice little calculator9 that requires the amount of debt as well as the interest rate; we're just missing the monthly payment. We're going to select an aggressive $412 a month, which is the effective bump in salary our average student obtained by graduating from college.

Based on these numbers, it will take six and a half years to pay off this debt. During this time frame, the student will be forced to live the same lifestyle he could have had with his high school job. Moreover, the high school student would have had the four plus years of college during which he was earning an income. At a minimum, it will take our average student ten years to surpass our high school graduate in terms of one's standard of living.

Yet most college graduates are not willing to make these aggressive payments, so let's run the numbers again based on a monthly payment of just $200. This time, it will take our student over nineteen years to pay off his loans. Compound interest is a powerful force and making minimum payments is a recipe for permanent indebtedness. If our student had reduced his payment by just $50 per month, it would take him over fifty-seven years to pay off his student loans. Students who take on one-hundred or even fifty thousand dollars in debt will find it virtually impossible to pay off their loans.

At some point then, college is no longer a bargain: it is an outright ripoff. But the tale gets grimmer still, due to a series of reforms enacted by the Obama administration, as well as that of the second president Bush. It is all but impossible to receive debt forgiveness on one's student loans. Commentator Vox Day utilized data from collegescholarships.org10 to summarize11 the all too typical process:

  1. The private SLM corporation [Sallie Mae] provides a student loan.

  2. The student defaults on the loan.

  3. The federal government pays the balance of the loan and its interest to SLM.

  4. The government sends the debt to a collection agency which adds a collection fee and a commission totaling more than 50 percent to the total. The agency is owned by SLM.

  5. The collection agency garnishes wages, income and even Social Security checks. The former student, now a debt-slave, will literally be paying until he dies.

This holds true, even for those unfortunate students who never obtained a degree. This is deeply troubling, as there is very little economic value for attending classes without graduating. Real reform is imperative, but it will not be forthcoming since the universities and the private loan companies receive the money irrespective of the performance of the student; the government, meanwhile, has made things worse for students, while making sure that schools and corporations never suffer for enrolling students who cannot graduate. Regrettably, then, students will have to fend for themselves.

Unfortunately, I am not capable of rendering an informed judgment as to whether or not someone should attend college. No doubt many of you are feeling pressure to enroll in a university and continue your education. For some of you, this is probably the right step to take. But for others, it would be a dreadful mistake. It would actually worsen your prospects by swamping you with debt. Before you make this decision, I encourage you to do all you can to determine the true costs of education. The benefits are well known, but the sometimes hidden costs are equally important.












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