Below is a complimentary Demography Unplugged research note written by Hedgeye Demography analyst Neil Howe. Click here to learn more and subscribe.

Be sure to check out his highly anticipated new book, The Fourth Turning is Here, which is now available for purchase.

ICYMI: 'Signal & Noise' is a new feature from Demography Unplugged. This column from Neil will be published biweekly.

Neil Howe: Is College Still Worth It? - 09.28.2023 student loan asteroid cartoon

Is college worth it? With more Americans turning away from higher education, people are questioning whether college graduates are really better off than those without degrees. (The New York Times

  • NH: It’s no secret that over the past decade, the public has soured on higher education. The signs are everywhere: College enrollment is down (see “College Enrollment Declines Deepen”). Public opinion has turned increasingly negative (see “Americans Lose Faith in College”). With wage growth for young people at record highs for much of the past two years, many new high school graduates are opting to get jobs instead. In response to this shift, a handful of colleges have cut tuition and some employers have dropped longstanding degree requirements. (See “In Hot Jobs Market, Teens Skip College,” “Cash-Strapped Colleges Court Reluctant Students,” and “It’s Getting Easier to Get Hired.”)
  • With the increase in young people turning away from college, one might assume that the much-heralded college wage premium—the gap between the earnings of college graduates and high school graduates—has disappeared. Perhaps, some may be hoping, the labor market has been so glutted by college graduates that a degree no longer makes much of a difference.
  • This is not the case. If anything, the wage premium is hovering near all-time highs. According to a recent analysis by the San Francisco Fed, the wage premium rose sharply for three decades beginning in the early 1980s. In 2000, the percentage difference between the average wages earned by workers with a four-year degree and workers with a high school diploma was about 68%. In the mid-2010s, it peaked at around 79%. It has since declined a bit to 75%, or around $30K a year. But this figure, needless to say, is still substantial.
  • Other estimates from the St. Louis Fed, the New America Foundation, the Burning Glass Institute, and the Institute for Higher Education Policy have come to a similar conclusion. Op-eds penned by university officials and policy experts insist that college really does improve your prospects in life. This line of messaging is perhaps summed up best by this headline that recently ran in The New York Times: “Let’s Stop Pretending College Degrees Don’t Matter.”
  • But hold on. Is the wage premium really the right way to estimate the benefits of college? Maybe not. A new wave of research is pointing out that the wage premium as typically calculated is hugely tilted towards overestimating the advantages of a college degree. Among other things, it does not account for the time value of money, the growing cost of college, or critical selection biases.
  • What are these considerations, and what happens when we incorporate them into the comparison?

1. Time value of money

  • The first thing that has to be accounted for is the present value of lifetime earnings. The wage premium is typically measured as the total difference in inflation-adjusted wages for a college graduate over a lifetime, resulting in a 75% wage premium.
  • But consider that collegians and noncollegians receive income along very different time paths. In their teens and early 20s, most collegians earn little income or (worse) go massively into debt. Meanwhile, most noncollegians earn income as full-time employees. And that income, on a discounted basis, is worth more than the money a college grad earns later, some of which is usually earmarked to pay back student loans (on average, over $30K for a bachelor’s degree). Failing to apply a discount rate biases the wage premium in favor of college, because it’s not accounting for any of these things.

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  • The Georgetown University Center on Education and the Workforce, which does not adjust for the present value of dollars, estimated in 2021 that the lifetime median earnings of a college graduate are $2.8M vs. $1.6M for a high school graduate (a $1.2M difference). But once you apply a reasonable discount rate, the difference drops to under $1M. In a report for the think tank Third Way, Douglas Webber—a senior economist at the Fed—put the discounted earnings gap at $900K.

2. Ability bias

  • Next, you have to account for ability bias. On average, people who decide to go to college are different from those who decide not to go. College pre-selects for certain kinds of students (bright, conscientious, driven, or perhaps just raised by parents with plenty of money and connections) who are likely to do well whether they go to college or not. It’s not clear to what extent college graduates are being rewarded for what they learn in college or for abilities or backgrounds that they possessed long before they enrolled. The fact that those who graduate from a college tend to do better does not answer the question of whether any randomly chosen person would benefit from going there.
  • Most estimates of the wage premium do not attempt to account for ability bias. (To be fair, the only direct way to measure it would be to make someone who has no interest in getting a degree go to college and see what happens.) But Webber does the best he can to standardize for it in his work; he controls for various measures that are positively correlated with life success (scores for aptitude, self-esteem, self-efficacy, etc.). After adjusting for ability bias, he found that the value of a college degree drops from $900K to $344K for the average person—that is, for the average 18-year-old who is about to enroll in college.

3. Survival Bias

  • A third consideration is survival bias. The wage premium measures the difference in earnings between those with a college degree and those without. But what about the people who try to get a degree and don’t finish? This is not a small number. According to the National Center for Education Statistics, less than half (around 47%) of undergraduate students who enroll in four-year institutions earn a degree in four years. By six years, this share rises to 64%. Nearly all the remaining 36% of attendees never graduate. What’s more, the share of non-graduates has risen over time; it rose in particular during the 1970s and 1980s, or during the late Boomer and early Gen-X college years.
  • After accounting for these three factors—time value of money, selection bias, and survival bias—the odds start looking iffy. Webber estimates that for students at expensive colleges that cost $50K a year, the chances they will do better than the median high school graduate are no better than a coin toss. Discussion of the wage premium often obscures the fact that, for every student heading off to college, obtaining a degree is itself a big “if.”

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4. Choice of Major

  • What college graduates earn depends hugely on their choice of major. This caveat is probably the most widely known and discussed. The difference in expected lifetime earnings between the top-earning major (chemical engineering, $3.6M) and the lowest-earning major (theology, $1.5M) is more than $2M.

5. Differences by Birth Cohort

  • In addition to not accounting for the potential and actual costs of attending college, the standard wage premium number does not adequately reflect changes in the premium experienced by different birth cohorts. Ordinarily, the wage premium is calculated (either on an undiscounted or discounted basis) by looking, every year, at the earnings of all people at every age between, say, 18 and 65. As each year passes, a new young cohort enters the calculation and an old cohort departs. Any sudden changes in the college premium experienced by this new young cohort has hardly any effect on the overall population premium.
  • But what if we are interested in focusing on what is happening to this new cohort (or any cohort) independently of everybody else? Wouldn’t it be great, for example, to isolate the premium for college versus noncollege Millennials born around 1990 without confusing it with the premium experienced by their parents?
  • It turns out that researchers at the St. Louis Fed, who must have asked themselves these questions, undertook exactly this sort of cohort approach. Moreover, instead of starting with income data, they started with household net worth data by age bracket, which they derived from the Fed’s triannual Survey of Consumer Finances. They call their metric the college wealth premium.
  • What they find is revealing. Across all cohorts born from the 1930s to the 1980s, they find that bachelor’s degree graduates gain considerably greater household wealth than non-college households (adjusted for age and household size). No surprise here. But when they break down the cohorts by decade, they find something more surprising: a steeply declining trend in the college wealth premium over time.

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  • For Silent Generation cohorts born in the 1930s (not shown in the above chart), the college wealth premium has been massive. For black college grads born in this decade, wealth was just over 500% larger than that of their noncollege peers; for Whites, it was 400% larger. For subsequent Boomer, Xer, and Millennial cohort, these premia have all declined. For black college grads, there was a precipitous decline (to near zero) among late-wave Xers born in the 1970s and among Millennials born in the 1980s. For white college grads, there was a less steep but still dramatic decline, to only 42%, for Millennials.
  • How do we account for this wealth decline? The authors rule out any explanation based on income. They calculate the lifetime income for each cohort from the same SCF data, and they find only a very slight decline (from the Silent to the Millennials) in the college-versus-noncollege income differential. They confirm, like so many other researchers, that the income advantage conferred by college ranges between about 50% and 67% for all cohorts and remains substantial for the youngest (1980s) cohort.
  • Clearly, we need to look for something other than income to explain the declining college wealth premia for younger cohorts.
  • The Fed researchers offer three suggestions. One is obvious: the rising cost of college. The authors explain, “A secular increase in the cost of attending college checks all of the boxes as a plausible explanation for our findings—it directly affects wealth, not income; it is a long-running story; and it is unrelated to changes in the demographics of college graduates for which we could control.”
  • Their other two suggestions are more speculative: one affects rates of return and the other affects rates of savings. First, they point out that earlier cohorts enjoyed a higher rate of return on their financial and real estate assets than later cohorts. And, they speculate, when this rate was higher, a bigger gap opened up between the returns available to college versus noncollege households. Second, they hypothesize that, among recent cohorts, it has become easier for college grads to undermine their wealth accumulation through mortgages and consumer debt. (The researchers concede they have no direct evidence of either explanation and simply urge further study.)
  • Surprisingly, the researchers do not consider the role of inherited wealth—even though it’s easy to imagine how this role has shifted over the last fifty years. Broadly speaking, within each consecutive cohort, college grads have comprised an increasing share of the total adult population. It is plausible that when this share was smaller (for example, when the 1930s cohort went to college), four-year degrees were more likely to be earned by children of relatively high net worth families, both among whites and blacks. As America’s meritocracy grew and a college degree became a more common middle-class path to economic advancement, it is reasonable to assume that the share of college grads coming from such privileged families shrank from one cohort to the next.
  • In effect—if this explanation is right—it is the democratization of the four-year degree that has weakened the once-close association between college and family privilege.
  • No doubt still other explanations may occur to us. One that I find especially intriguing is the idea that college and noncollege livelihoods are increasingly associated with different zip codes, different lifestyles, and (therefore) different living costs. Increasingly, college Americans are sorting themselves into more expensive supercity hubs within blue states and noncollege Americans into less expensive flyover exurbias within red states. (See “Biggest Metros Spawning Greatest Inequality” and “Why Americans Are Moving to the Red Zone.”)
  • The question arises: At what point does the cost-of-living penalty imposed by the collegiate lifestyle impose a substantial barrier to wealth accumulation? Compare the young college-grad art historian who works for the Met in New York City to the young noncollege welder who works for PepsiCo in Shreveport. Between those two budding professionals, we’re looking at vast differences in the cost of housing, meals, energy, healthcare, and transportation—not to mention taxation. Differences in income simply do not tell the whole story.
  • Let’s sum up what we’ve learned. Year in and year out, economists and college lobbyists tell us that Americans who earn four-year college degree enjoy a very large and very durable income advantage over those who don’t. As we have seen, however, the magnitude of this advantage shrinks considerably, in some cases dramatically, when we reconstrue the premium in a realistic manner that includes all risks and costs.
  • Above all, the question of whether college pays off cannot be answered with a simple “yes” or “no.” And the answer is not the same for everyone. It remains true that the median college graduate makes significantly more than the median high school graduate—but you have to make it to graduation first. And the odds of success change depending on your choice of major, what you pay to attend, and your own background. The riskiness of this bet has undoubtedly risen over time.
  • When we look at the wealth premium, as opposed to the income premium, we come to a different—though equally troubling—conclusion. This is the finding of the St. Louis Fed researchers that the wealth premium, while it may have been impressive for earlier generations, has been declining rapidly for younger generations. And keep in mind that their calculation of the college wealth premium does not even consider the selection or survival biases that (we found) so profoundly altered our measure of the college income premium.
  • Americans’ increasingly negative view of higher education is no doubt influenced by a sense that the game is rigged. Even though some employers have dropped college degree requirements, nearly two-thirds (62%) still require one for entry-level jobs. As long as college is considered the price of admission to the labor market, many families will feel like they have no choice but to pay it. 

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Neil Howe is a renowned authority on generations and social change in America. An acclaimed bestselling author and speaker, he is the nation's leading thinker on today's generations—who they are, what motivates them, and how they will shape America's future.

A historian, economist, and demographer, Howe is also a recognized authority on global aging, long-term fiscal policy, and migration. He is a senior associate to the Center for Strategic and International Studies (CSIS) in Washington, D.C., where he helps direct the CSIS Global Aging Initiative.

Howe has written over a dozen books on generations, demographic change, and fiscal policy, many of them with William Strauss. Howe and Strauss' first book, Generations, is a history of America told as a sequence of generational biographies. Vice President Al Gore called it "the most stimulating book on American history that I have ever read" and sent a copy to every member of Congress. Newt Gingrich called it "an intellectual tour de force." Of their book, The Fourth Turning, The Boston Globe wrote, "If Howe and Strauss are right, they will take their place among the great American prophets." The follow-up book, The Fourth Turning Is Here, is available now.

Howe and Strauss originally coined the term "Millennial Generation" in 1991, and wrote the pioneering book on this generation, Millennials Rising. His work has been featured frequently in the media, including USA Today, CNN, the New York Times, and CBS' 60 Minutes.

Previously, with Peter G. Peterson, Howe co-authored On Borrowed Time, a pioneering call for budgetary reform and The Graying of the Great Powers with Richard Jackson.

Howe received his B.A. at U.C. Berkeley and later earned graduate degrees in economics and history from Yale University.

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