Accounting for the Rise in College Tuition [pdf]
nber.org
nber.org
"... our results show the Bennett hypothesis can fully account for the tuition increase on its own."
i.e. prices go up after the government provides financial aid and/or loan subsidies.
This was examined in another paper earlier this year: https://www.newyorkfed.org/medialibrary/media/research/staff...
Original articulation of the Bennett hypothesis: http://www.nytimes.com/1987/02/18/opinion/our-greedy-college...
While insurances have provision that they will not pay above some fixed globally agreed cost but this upper bound is high enough to generate huge margins while eliminating competition to reduce the prices. On the top of this there would always be upward pressure by outliers. I'm not sure what economic model can bring the price competition back while still allowing safety net as well as quality of service to consumers.
- Insurance has agency problems. The people deciding the treatment (doctors and, to some extend, patients) are not the folks paying. So they want to maximise quantity (doctors and patients) and expense (doctors).
- Car repairs are not bought often, so it's not worth most people's time to understand them. Moreover, repairs are often covered by the opposite side, so you (and your insurance) company may only need to show reasonable effort to shop around, and are not invented to spend time/effort to minimise the price, as it's the other side which bears the cost.
Edit: The $30,000/year reflects current incomes, the $640,000 lifetime difference is based on 1987 dollars, like @twoodfin pointed out. It works out to greater than double lifetime earnings using the adjusted $1.3 million figure.
Median income is 52k. Split the difference and assume it's 52 - (13.6k /2) = 45K * 47 = 2.115 million.
So, now 680k is an extra 32% which sounds great! Except that's pretax, and takes ~100+k of capital to get and your get 4 years less for interest to compound.
If you actually work out the numbers, paying for collage adds less money than buying that much stock and giving your kids the interest from that stock while they work. So, on it's on a BS is a poor investment, the only advantage is it's a highly leveraged investment.
PS: For comparison the median plumber makes ~49k/year in the US. Median electrician also makes ~50k/year.
[0] https://repository.library.georgetown.edu/handle/10822/55930...
http://m.wolframalpha.com/input/?i=plumbers+lawyers (note difference in salary as well)
Anyway, these numbers work best when you compare "all college graduates" to the "holy grail of all trades," the oft-referenced plumber. Most non-college graduates are not swimming in thr rich plumber mondy. Once you take out the bottom earners out of the college graduate pool, the difference in numbers becomes much more drastic, I think.
Why are you using 30K as the baseline? The median per capita income in the US is 56K [1].
40 years will earn you $2.24 million. Earning $640K or 29% more isn't as substantial as you make it out to be.
Let's also factor in 4 years lost income and cost of attending an institution.
(4 x 30K (starting salary)) + (4 x 40K (tuition/housing/food at a public university)) = 280K
$640K - 280K = 360K
360K is 16% of total earned income. That's not that much. We're also not factoring in interest, assuming you borrowed money to pay for that degree ... and let's not forget I'm quoting prices for a public university while the $640K figure includes some very expensive colleges that might put you in the red.
If you're going to attend a university, don't do it for money. That's a really stupid rationale.
[1] https://en.wikipedia.org/wiki/Personal_income_in_the_United_...
Where are you getting that from? The median personal income is very close to 30K. The median household income isn't even 56K.
And where did you get 40K per year for total cost at a public university, the average is closer to 20K.
Furthermore, why are you including cost of living for college students but not for workers when calculating the opportunity cost?
>If you're going to attend a university, don't do it for money. That's a really stupid rationale.
Even if you're calculations were correct, they're only correct for generic "college". If you plan on choosing a major that pays better than average, even with your calculations, attending university for the money would still be a net win.
The data is clearly sourced it the wikipedia article. Your data is either old or just wrong.
> Furthermore, why are you including cost of living for college students but not for workers when calculating the opportunity cost?
That's a fair point. You will still incur costs that you wouldn't otherwise, like books, etc.
> If you plan on choosing a major that pays better than average
Where is the evidence the increase in earnings is the result of the degree rather than selection bias? Correlation is not causation.
Point me to the line in that article that says that.
Here is a quote from the 2nd paragraph.
"The overall median personal income for all individuals over the age of 18 was $24,062[6] ($32,140 for those age 25 or above) in the year 2005.[7] The overall median income for all 155 million persons over the age of 15 who worked with earnings in 2005 was $28,567.[8]"
Where are you getting 56k from?
>Where is the evidence the increase in earnings is the result of the degree rather than selection bias? Correlation is not causation.
That is entirely possible, but many studies have attempted to correct for this. Here is a good summary of several.
http://www.nytimes.com/2014/05/28/upshot/the-value-of-colleg...
There are also a few other problems with your formula. $30k is way too high for an 18 year old just out of high school. And again, 20k per year is closer to the average total yearly cost of a public school.
Let's say 20k per year in income which is much closer to the median starting salary for an 18 year old. Let's also say that if it costs a college student 10k a year to live that it only costs a non-college student 5k to account for extra costs for the college student.
So we have 20k a year in lost income and 15k a year in costs over what the student would have paid had they not attended.
That's 4x20k + 4x15k = 140k. About half of your estimate.
That also doesn't take into account that college students are free during breaks to work, or take paid internships. College only takes about 30 weeks per year, while the workers will be working about 50 weeks out of the year. (Also Engineering and Computer Science internships in particular pay fairly well.)
https://en.wikipedia.org/wiki/Personal_income_in_the_United_...
15 years and older: $28,567
18 years and older: $24,062
25 years and older: $32,140
And note that we should not be using the median of the general population, but instead the median of the population that did not attain a bachelors degree and comparing that to the median of the population that did attain a bachelors, but no higher, degree.
Taking the unweighted average income of those over 25 years of age who have completed some high school, graduated high school, and completed some college and comparing it to those over 25 years of age who have attained a bachelors degree you come up with
($25,039 + $31,539 + $37,135) / 3 = $31,238 Income of those with a bachelors degree $50,944
I only meant to dispute the claim of @wyldfire that a difference of $640,000 (1987 USD) is "really small." Even this comment does not represent a rigorous assessment of the value of a college degree. See The College Payoff: Education, Occupations, Lifetime earnings [0] if you want that assessment.
[0] https://repository.library.georgetown.edu/handle/10822/55930...
Plug that into the formulas above and it's still nowhere near half after all the costs are factored in, although it's a far healthier percentage.
One thing that isn't noted though ... there is a fundamental difference between causation and correlation. There is no evidence to suggest colleges add that value. Merely that people who earn more go to college.
That $1.3M in 2015 dollars, and over 47 years of (potential) employment from 18-65, it's $27,000/year.
Of course, past performance is no indication of future results. And I suspect that this is the kind of statistic where "average" is misleading: Most exceptionally high earners have college degrees.
Interestingly though, most exceptionally high earners have post-graduate degrees, according to Gallop[1]. When you exclude that group, the non-college graduates make up the largest portion of the highest earners.
If there is causality here, it seems one has to be mindful to continue their studies long enough to see the benefits. Simply getting a degree does not seem to pave the way to a better income.
[1] http://content.gallup.com/origin/gallupinc/GallupSpaces/Prod...
However, it's less clear if the higher incomes are caused by the increased productivity afforded by education, or it's merely a signaling effect: productive people go to college to signal to the employer that they are intelligent, hard working, and willing to commit to a career in the field by irreversibly burning years of their lives and future incomes on the hope of penetrating the respective professional field. It's most likely, a combination of both.
What critics of the education bubble point out is not that a degree is necessary to earn a good income; but that the onerous costs of modern education have to little to do with the actual productivity gain and useful skills students earn in return.
In support of this view we can see how the MOOC revolution failed to produce significant effects on the labor market: it's not that MOOC education is has low value (quite the contrary), it's that is cheap enough that too many people can afford it, negating the signal (or "sheepskin effect" of an expensive degree).
Figure 7's source is State Higher Education Executive Officers Association, so let's get the report directly from the source. Here is the latest report: http://www.sheeo.org/sites/default/files/project-files/SHEF%.... Figure 2 shows inflation adjusted, per student state funding peaked in 2001 rather than monotonically decreasing since the 80s.
That's not because of taxes. Taxes haven't gone down.
Doctors and Pharma have extracted ever more cash from Medicaid. Wall Street has badly mismanaged public pensions as public unions have demanded ever richer pensions. Prison populations have multiplied. It all adds up to less money in state budgets for education.