Adam Looney and Michael Greenstone at The Hamilton Project recently released a new study in what is now a genre of studies purporting to prove just how great a deal a college degree is. Their conclusion is predictable: a college degree is the best investment you can make. But this conclusion isn’t exactly true; the value of a degree depends on a variety of factors and for most, it isn’t much of an investment.
The authors of the study base their argument on the assumption that the college diploma is like any other investment, “From any investment perspective, college is a great deal.”
At best, however, the idea that a degree is like any investment is debatable. Unlike Apple stock or a US treasury bond, for example, a degree has no inherent value that is recognized by any trading market, because whatever value a college education has depends entirely on you, the degree holder, on your intelligence, your creativity and other factors unique to you. In fact, the entire earnings effect of a college degree can be explained by the personal quality of the graduate alone, if we assume that intelligent, creative and astute individuals are more likely to earn more simply because they are smarter. If so, then the education is only important to the extent that in our society you can’t get ahead without a degree from the right school and the right program and smart, intelligent and astute young people know it. In this sense, a degree has no value whatsoever.
It is this variability directly related to the degree holder’s personal qualities that makes the “investment” in a college education significantly more risky than buying $100,000 worth of bonds or a Starbucks franchise, and therefore unlike any other investment. If you decide to sell those standard assets, such as bonds, you can get cash. The sale is not predicated on your personal qualities, on whether you are talented or smart or creative. You may be dead to the creative spark and lack talent, but you will still get the cash if you sell some bonds you got from aunt Edna. Not so with a college degree.
Another distortion is introduced by the idea of averages. In the discussion on the worth of college degrees, which is intimately bound up with the nature of the graduate and her personal abilities, averages are meaningless because the statistical idea of an average makes logical sense only when applied to homogeneous units, like widgets. Heterogeneity in a population creates problems for the concept of average. When talking about human individuals, particularly in debates that intimately involve personal attributes such as knowledge and talent, averages are almost meaningless. So when the authors write something like the following,
Over a lifetime, the average college graduate earns roughly $570,000 more than the average person with a high school diploma only—a tremendous return to the average upfront investment of $102,000.3 An associate’s degree is worth approximately $170,000 more than a high school diploma.
Then the authors present a claim that is highly misleading, and not just in some hypothetical sense as far as personal qualities go, it is also misleading mathematically. Suppose, for example, that in a population of college graduates, 30 percent of those graduating from top schools and top programs make extraordinary returns; but the rest, the majority, make much less. Specifically, suppose that of 6 graduates, 2 make 250,000 a year while the rest make 11,000 a year. Your average salary for a college graduate will be 88,000 dollars a year, a profoundly misleading result because the majority of the population never sees those kinds of average returns. This bogus result is the effect of outliers: statistically irrelevant data points which distort the results. The earnings overall in our example are abnormally high because they have been distorted by the elite cohort and their outlier performance. To obtain a more realistic average, the exceptional earners would have to be removed from the sample. This is why you have be very careful when someone claims that on average college students earn more or have better jobs, most may not, except for a few lucky ones.
If we looked at median earnings in the above example, we’d find $11,000. In fact, the median earnings of college graduates are higher than earnings of those who did not graduate from college. Before you rush in your college application, however, consider that, in fact, these median earnings figures are again profoundly misleading.
While the medians are unquestionably higher for college graduates, in fact those who did not go to college are more likely to make more. How? Those who did not go to college don’t have to pay enormous student loan debts. The earnings of college graduates (whether median or average) must be reduced by the student loan payments, which can be in some cases as high as a mortgage payment.
The authors of this study do not explain in their summary of results; whether they have accounted for such potential problems. Yet the effect of outliers and the issue of median salaries versus student loan payments have real impact on the debate of the worth of a college degree, because if we remove these exceptional cases, and if we account for the student debt many incur in order to earn degrees, we get a result much more in tune with anecdotal reality: college is a bad investment for most who attempt it, except for the few who graduate from the top programs and institutions (with little or no debt). But that’s not what the authors of the study argue. Their claim is much broader and much more problematic.
If there are costs associated with not attending college, and there certainly may be for talented people who can’t afford to go to the right program in the right school, there are also serious costs associated with graduating and then not being able to earn enough to pay one’s student loans. One need only read some of the articles in The New York Times’ series on college graduates unable to find jobs and being crushed by student loan debt to see that reality belies whatever economists have been able to show about the extraordinary benefits of a college education.