The Numbers That Say a College Degree Still Makes Financial Sense

November 3, 2014

The value of a college degree is a hotly debated topic in many families. It costs a lot and takes a huge financial and personal commitment to pursue either a two year diploma or four year degree. Just like evaluating any big purchase, we often wonder if it is worth it.

The CollegeBoard reported that in-state public school tuition for four year college increased 2.9% in 2013-14. That was the smallest increase in 30 years. Two year colleges increased tuition by 3.5% last year. College cost skyrocketed over the past decade averaging 4.2% with the annual increases peaking at 8.5% in post 1

But this is only half of the question. The cost may be accelerating, but what about the benefits? While it is impossible to place a value on education, there is a financial reward in terms of higher earning power for college graduates.

The Federal Reserve Bank of New York recently released a study of the financial value of a college degree. The Fed looked at the cost of obtaining a four year degree in terms of tuition and fees paid as well as the opportunity costs of lost wages. These costs would be offset by expected higher wages over a forty year working life. To get a present value of these wages the flow of higher annual earnings was discounted to the present.

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The value of a high education declined through the seventies and did not show any appreciation until the mid-eighties. For two decades a college degree paid big dividends in terms of higher expected wages. This trend reverses slightly after the recession in 2000, maintained a level benefit through the following decade, and has recently slipped a bit. Over the thirty year time period the value of a college degree has risen from $100,000 to over $300,000 in present value dollars.

Looking at the value of the college degree in another way, the Fed examined how long the college graduate would have to work in order to recoup the costs of tuition, fees and lost wages.

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Here the benefit of the college degree has remained stable over the past twenty-five years. It takes about ten years to recoup the costs of a four year degree. Even though the cost of a college degree have skyrocketed, the time to recoup the costs has remained the same. The researchers attribute this to the increasing gap between wages of college educated workers and those with only high school diplomas. The college students incur costs to attend college in terms of tuition, fees, and forgone wages but once they graduate, the higher wage levels rapidly reimburse the graduates.

So that family argument over the cost and value of a college degree might focus on some helpful facts. While college costs have exploded over the past decade, the rapid acceleration has moderated and is showing signs of leveling off. In terms of value, two points emerge. First the value of the college degree has remained constant at about $300,000 over the working life of a graduate. Second, with higher expected wages, the payback period has remained constant at about ten years from graduation.