By Marc Chandler, Global Head of Currency Strategy, Brown Brothers Harriman
The beginning of the new school year heightens the anxiety over the rising cost of higher education. The cost of a college education is increasingly beyond the means of average American family. Tuition has risen faster than inflation, student debt has soared and jobs are difficult to secure.
At the same time, it seems that more people are questioning the value of a college degree. The New York Federal Reserve’s Current Issues newsletter recently took a look these issues. The authors, Jaison R. Abel and Richard Peitz, also posted an article “The Value of a College Degree” on the NY Fed’s blog Liberty Street that looks at the cost of an associate and bachelor’s degree. They conclude that the benefits still outweigh the costs. While the cost have risen, the wages to workers without a two or four-year degree have fallen.
These two Great Graphics come from their work and illustrates their conclusion. This first chart shows their calculation of the net present value of a bachelor’s degree between 1970 and 2013. It is expressed in constant 2103 dollars.
They estimate that the value of a four-year college degree fell from about $120,000 in the early 1970s to about $80,000 in the early 1980s. It then proceeded to more than triple in the next decade and a half to nearly $300,000 by the late 1990s. It has been surprising stable since. It has eased a bit in in the post-crisis period, but it remains near the all-time high.
The second chart shows how long one needs to work to recoup the cost of college. The authors use the discounted cash flows that were used to calculate the net present value to determine how many years it take to turn the cash flow positive. To say the same thing, after earning a four-year degree how many years does it take to recover the cost of the degree.
It shows that the time required to recoup the costs of a bachelor’s degree has fell significantly in the 1980s and then leveled off. In the late 1970s, it took nearly two decades to coup the cost of college. Now it takes about half as long.
The authors conclude that the value of a college degree remains near its historic highs, while the time to recoup the cost is near historic lows. This study is part of a larger work. In an essay earlier this year, the authors calculated the return on investment for the average colleges student was about 15%. In a subsequent report, the authors look at the distribution of the wages earned by college graduates and find that for a sizable fraction, a college degree has not paid off. College may be a negative investment for one in four who attend.