Beth Akers, an economist specializing in labor economics and the economics of higher education, has written a book about whether college is worth the cost. Her book, Making College Pay, is readable and provides practical advice for families on how to reduce the risks associated with investing in a college education.
Dr. Akers argues that a college education is still worth it, but she also identifies several situations in which college sometimes doesn’t pay.
According to Dr. Akers, a college degree is financially worthwhile if the increase in lifetime earnings exceeds the cost, after adjustments for inflation, interest payments on student loans and the opportunity cost of forgone earnings while enrolled. She writes, "most people aren't overpaying for college … because, despite the high price tags, the extra earnings afforded by a college degree tend to far outweigh the up-front cost."
College graduates not only have higher income, but also lower unemployment rates. She says that concerns about the cost of college and the cost of borrowing are misplaced. If families are careful to consider the risks associated with obtaining a higher education, the payback period is about a decade, the equivalent of a 14% annualized return on investment.
Dr. Akers has worked for think tanks, such as the American Enterprise Institute, Manhattan Institute and Brookings Institution. She’s also worked as a staff economist for the White House Council of Economic Advisers and a visiting research scholar at the Federal Reserve Board in Washington, DC. She has a Ph.D. in economics from Columbia University.
When College Doesn’t Pay
There are several circumstances in which college is not worth the cost.
- The student does not graduate from college. They have the debt, but not the degree that can help them repay the debt.
- The student takes too long to graduate from college. This increases the cost of college as well as the opportunity cost associated with college enrollment.
- The student picks the wrong college. Some colleges have inferior outcomes, such as lower graduation rates and lower income after graduation.
- The student chooses the wrong academic major. Some majors earn less than other majors. If you pick a major that doesn’t pay very well, you might not earn more than the typical high school graduate.
- The student graduated, but bad timing affected the value of the degree. This can include graduating into a recession or pandemic.
Some of these factors are under the student’s control and some are not.
How to Reduce the Risk
There are several ways to mitigate risk. Some of these approaches are specific to the college and the major.
First, do your research before choosing a college. Use the U.S. Department of Education’s College Navigator and College Scorecard, as well as the college’s net price calculator, to get information you can use to evaluate the tradeoffs between cost and outcomes, including graduation rates, job placement rates and average income after graduation. Each college’s net price calculator can provide a personalized estimate of the real cost of college, after subtracting grants and scholarships from the total cost of attendance.
Majors matter. A degree in STEM or healthcare has a higher lifetime income than a degree in arts, social work and education. College Scorecard provides income data that is specific to a particular college and academic major. The book also includes an appendix with average earnings by academic major.
Dr. Akers argues that student loans can reduce the financial risk of a college education. Paying for college with student loans reduces the need to work a part-time job while in school. This yields higher grades and graduation rates. Federal student loans also provide several safety nets, such as deferments, forbearances, income-driven repayment, and options for loan forgiveness and discharge.
Income-share agreements also base the loan payments on income, shifting the risk of failure from the borrower to the lender. But, income-share agreements may be more expensive than federal student loans.
A handful of colleges provide their graduates with an income guarantee.
You can also reduce the risk of an all-or-nothing degree by unbundling your education through coding boot camps, competency-based education and getting your employer to pay for your education.
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May 03, 2021 at 09:04PM
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How To Make College Pay - Forbes
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