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In a recent article for Forbes Magazine, Kathy Kristof writes about “The Great College Hoax,” which debunks the premise that student debt will be offset by higher lifetime earnings. Kristof discusses the census finding that, on average, college-educated individuals earn $25,900 more per year than high school graduates, pointing out the fallacy of inferring too much about the reasons for this income discrepancy.
Student Loan Bubble sees a much more serious statistical error in this reasoning: recent graduates earn less at the beginning of their careers, and average (also called “mean”) earnings are a distorted representation of actual earnings. A few individuals (so-called outliers) who earn much more than the rest will distort the mean, while the median will be resistant to this problem. Wikipedia provides the following explanation of median versus mean:
The median is primarily used for skewed distributions, which it represents differently than the arithmetic mean. Consider the multiset { 1, 2, 2, 2, 3, 9 }. The median is 2 in this case, as is the mode, and it might be seen as a better indication of central tendency than the arithmetic mean of 3.166.
Calculation of medians is a popular technique in summary statistics and summarizing statistical data, since it is simple to understand and easy to calculate, while also giving a measure that is more robust in the presence of outlier values than is the mean.
The following table, entitled “Earnings By Occupation and Education,” presents median yearly earnings for individuals aged 21-24, broken down by educational attainment. Click on the image for the full-size version. The original census data are available from http://www.census.gov/hhes/www/income/earnings/call1usboth.html
Students cannot expect to earn an “average” amount of money; in this case, the median is a much more accurate picture of reality. Among recent graduates, the median income discrepancy between college and high school grads is a mere $7,415, which is accompanied by tens of thousands in student debt repayment. Later in life, a college degree is “worth more,” but student debt repayment usually begins when the student is 21 or 22 years old; student lenders are not content to wait until the debtor earns a higher annual income.
It is the conclusion of Student Loan Bubble that the median income statistic deserves more attention, and that lifetime earnings are a misrepresentation of what recent graduates can expect to earn. Between college and high school graduates, loan debt uniquely affects the former, who do not earn dramatically more than the latter. College graduates in their early 20s are at unique risk of not earning enough to repay their student debts. The risk inherent in managing student loans as a young professional may not be offset by future earning potential.
Excerpt from: http://www.forbes.com/forbes/2009/0202/060.html
Census figures show that college grads earn an average of $57,500 a year, which is 82% more than the $31,600 high school alumni make. Multiply the $25,900 difference by the 40 years the average person works and, sure enough, it comes to a tad over $1 million.
But anybody who has gotten a passing grade in statistics knows what’s wrong with this line of argument. A correlation between B.A.s and incomes is not proof of cause and effect. It may reflect nothing more than the fact that the economy rewards smart people and smart people are likely to go to college. To cite the extreme and obvious example: Bill Gates is rich because he knows how to run a business, not because he matriculated at Harvard. Finishing his degree wouldn’t have increased his income.
All the while students have been lulled into thinking of the extra $1 million that will be theirs, they have been forced to disgorge an ever larger fraction of it in pursuit of the degree. While the premium that college grads earn over high schoolers has remained relatively constant over the past five years, the cost of acquiring a degree has risen at twice the rate of inflation, dramatically undermining any value a sheepskin adds.
Offsetting that million-dollar income discrepancy is the $46,700 four-year cost of tuition, fees, books, room and board at a public school and $99,900 at a private one–even after financial aid, scholarships and grants. Add all this to the equation and college grads don’t pull even with high school grads in lifetime income until age 33 on average, the College Board says. Even that doesn’t include the $125,000 in pay students forgo over four years.
I don’t buy it… what about 10 years after they graduate? what about the earning potential of the degree? art history isn’t going to earn as much as electrical engineering, so maybe the lesson is that people should only get loans for certain degrees
Comment by skeptic — 2009/02/26 @ 1148
Thanks for the criticism – I will probably revisit this in a future article, where I will talk about the median lifetime earning potential. The data are available from the Census for how different professions fare, but if you’ll just click on the Census link, you will see that in 10 years, the median income is increased by about $10000.
Comment by Student — 2009/03/13 @ 1133
[...] The lifetime earning myth: go to college, make $1 million extra. The reality: recent college grads a… [...]
Pingback by Student Loan Bubble - The Lifetime Earnings Myth Part II: College Grads only earn $732576 more than High School Grads — 2009/03/14 @ 0800
Some of the comments here are laughable. Its not a million its only $732,576. Do you know anyone who would scoff at a mere $17 to $18 thousand extra dollars per year? that’s a nice mortgage payment AND a car payment each and every year for 40+ years of work. Don’t forget, it is also about where you live. If you live in suburban and rural areas where factory line jobs have disappeared, especially in the northeast. When state governments go on hiring freezes, those without educations can’t even use civil service to their advantage. Not only are your wages lower than before, you may have no income at all. Your using Bill Gates as a skew to the numbers misses the point. Example: the average Pennsylvania teach makes between $35-$40,000. Not Bill Gates territory, but do require Bachelor degrees. That’s $17-$19 per hour (Masters degrees are required to be paid even more $$). What’s minimum wage? $7 and change? What’s Wal-Mart paying per hour? $8? I still see double the average salary with the degree. A bookkeeper may get $15 per hour with service time and experience, but a CPA makes at least $60-$80K per year. Bachelor degree required. Thats $28-$38 per hour. Why do schools enrollments increase in times like today? Because the High School diploma just doesn’t cut it when you want to get a real job and make real money. Sure, there are some high school grads who live in major metros who make more than suburban college grads, but don’t compare those 2, make sure you compare them to their urban professional counterparts. Again, as a rule, its no contest…
Comment by rfox — 2009/04/16 @ 1221
@rfox – I agree with some of your points, and disagree with others. More than anything, I really appreciate your comment.
Regarding the 1 million-vs-750k, I’d like to refer you to the schedule for when these benefits are received, which is graphed in this post. Critically, income doesn’t rise until after the loans are paid off. Recent grads might expect the $17,000 extra you mention (which they won’t receive until they are 30+), which leads them to make a bad financial decision to acquire more student loan debt than they will be able to pay off.
Regarding the mean-vs-median statistics, I think you missed something. It is the mean (AKA average) that would skew the results in the “Bill Gates scenario,” but I am using the median. The reason the census data reports the median (which I based my data on) instead of the mean is exactly as you described, but you were incorrect to attribute that error to my figures. Let me clarify: the reason the student loan industry claims it is $1 million is because they use the mean data (the “Bill Gates scenario”) and the reason I claim it is $750k is because I use the median data (the US census data).
But to address your main thesis, I COMPLETELY AGREE that college is worth it. Sorry for the caps, but I have to say that I learned so much in college I can’t quantify it. Also, I was lucky: I paid for 1.5 years with pure debt, and my family paid for 2.5 years. This left me with the equivalent of “a luxury car-worth” of debt, which is tough to pay off but doesn’t take me out of the game. It has held me back, and I have been forced to sacrifice many opportunities to make critical investments, but I do believe that I got a major leg-up by attending what is unarguably one of the finest schools in the world.
That said, the point of the Student Loan Bubble is that many students took on more debt than they could responsibly repay, which is very analogous to the housing bubble. This is not to say that college is bad (just like home ownership is not bad), and I thank you for your comment especially because I now realize this is something I should clarify. Where does this leave us? Well:
1) college (and education in general) is good
2) excessive debt is bad
therefore:
3) students should go to affordable schools
I have identified one reason why students go to schools that cost more than they can afford: it is the $1 million myth. This myth is not based on fact, and it has been used by the finance industry partially to delude students into believing they can borrow more than they should. Students (and their parents) are unable to make the right decision when it comes to student loan debt because they are being fed bad data.
One reason why enrollment might rise alongside joblessness is that student loan debt is artificially cheap, due to federal legislation, and a job is not required in order to qualify for this type of financing. This is another topic covered on Student Loan Bubble, but the brief is this: artificially cheap student loan debt leads to tuition inflation, which is unsustainable, and is the second critical factor that makes the Student Loan Bubble analogous to the housing bubble.
Regarding other socio-economic factors like rural-vs-urban, that’s interesting. The census data are really rich, so I’d like to look into that.
Thanks for your comment, and please check back in with Student Loan Bubble!
-Student
Comment by student — 2009/05/22 @ 1003
A very important missed point here is training to become tradesmen: plumbers, carpenters, mechanics, air conditioning repairmen, bookkeepers, etc. When I was in high school (50 years ago), students and their parents had the choice to follow a college preparatory track, or a vocational track. There were two different high schools, right next to each other.
Before higher education became the huge industry it is today, people recognized that aptitude mattered, and that not everyone was cut out for academia. In vocational school, students learned to become tradesmen, and as a result ended up earning excellent salaries and living excellent lives as professionals in their trades.
In the 1970’s, the feminist educational establishment led to the virtual abolition of vocational high schools, sending the same boys into the streets as dropouts rather than training them to become apprentices for jobs suited to their abilities.
The growing gap between the college educated and the not college educated has less to do with the value of a college degree than it has to do with the devaluing of people better suited to trades, mostly boys, and the gearing of high schools only toward pencil-pushers, mostly girls. Today all high school students are pressured into becoming consumers of student loans, for sometimes meaningless degrees. More than 60% of all college students today are girls. More than 90% of all incarcerated juvenile offenders are boys.
Comment by chuck wintner — 2009/06/21 @ 1815
Um… you miss a critical variable in your numbers. Ever heard of a little thing called inflation? Adjusted over a lifetime of work, the highschooler according to your graph, the income is linear. College is more exponental (but still reasonalbly flat). Adjust for inflation and I’ll bet the numbers come closer to $1m than 750k.
Comment by Dave — 2009/10/30 @ 1209
@Dave – thanks for your comment. You are correct that these numbers do not reflect inflation; instead, they are reported in constant year-2000 USD. This is not an oversight.
In fact, the term “adjusted for inflation” means to convert inflationary currency into constant-value currency. Your comment suggests performing the opposite conversion, which will result in dollar values that are not comparable over time.
Have you ever heard stories about early 1900s “movies that cost a nickel?” This is not because movies were cheaper then; the inflation adjusted cost of movies has stayed relatively constant, but the value of our currency has changed. I hope this helps to explain why it is important to take inflation out of the equation.
When making longitudinal comparisons, it is critical to use a single unit of measurement. If you will reread the excerpt from Forbes (in this article, quoted above) you will notice that their figures are also based on current dollar values. The Forbes article is explicit about where the $1 million figure comes from, and it has nothing to do with inflationary USD. Once again, in order for my numbers to be comparable to the Forbes numbers, we must all use constant-value dollars, instead of dollars whose value is not constant.
I do appreciate your thoughts on the matter, but I encourage you to read the Forbes article if you are still unclear as to where the $1 million figure comes from. Inflation is not part of the $1m calculation, nor is it part of the $750k calculation, and these numbers are correct.
Comment by Student — 2009/11/01 @ 1300
@Chuck: Sorry for the delay in responding. I think you are onto something: it used to be that publicly funded, technical schools for high-school aged kids would prepare students for valuable professional jobs, and it now seems that technical schools (AKA vocational schools) are virtually non-existent.
Nowadays, it seems like people are trained for technical jobs either at college, or through private, post-secondary schools that grant “associates degrees.” In other words, people still get trained for that sort of job, but they must somehow pay for it up-front, before they have a career.
Like you said, most high school students face some sort of pressure to consume student loans, because there is no publicly funded option for anyone to enter a skilled profession.
Comment by Student — 2009/11/01 @ 1311