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Concern for the College Investment

By Realizingresonance

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Photo courtesy of iStockphoto.

I would say that the most recent political fight to get focus in the reality show that is the US Presidential race is college student loan debt, but the narrative has changed a few times before I could finish writing this article. In a re-election strategy, President Obama is seeking to revive the youth vote from 2008, so he is steering the agenda to education, but with more worry than hope this time around. I must admit that I find it disconcerting that college educations have become a policy concern, given that we are having enough issues with education at lower levels of the public school system. As a college graduate, who struggled to obtain a B.S. after more than a decade, while working fulltime, I recognize the value I have gained from this investment, value in the sense of greater esteem, economic benefits, and the enriching experience of knowledge acquisition. Some Americans are questioning the return on a college investment and believe that it no longer adds value. This is my answer to that question.

Human capital investment is the idea that government and society can implement policies that increase the productivity and value of its citizens. Spending on education, training, and skill enhancement are investments that leads to future productivity and economic growth according to human capital theory. This idea is intuitive to me as I attended college to obtain an education, as well as the degree that documents my achievement, in order to improve my future salary and economic security. Furthermore, I work for a major corporation that is willing to pay for higher education assuming the skills I learn are related to some type of benefit within the company. If education is seen as human capital investment by me and my employer, it seems to follow that it should be recognized as a primary public policy concern as well. The father of capitalism, Adam Smith (Cochran, Malone 305) said,

The acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprentice-ship, always costing a real expense, which is a capital fixed and realized, as it were, in his person. Those talents, as they make a part of his fortune, so do they likewise of that of the society to which he belongs. The improved dexterity of the workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labour, and which, though it costs a certain expense, repays that expense with a profit.

My Collegiate Journey

I grew up believing that college was the way to greater income, but my motivations for attending college ran much deeper than that, with duty, pride, curiosity, and wonder contributing in no small part to my desire for higher learning. I began school in 1994, attending community college, working a part time pizza delivery job , with no major, and little motivation to study hard, but a really cool seventeen credit interdisciplinary class with three professors called Trekkie Dreams. I lived at home, but when my car broke down I could not complete my second quarter, I had to withdraw, I moved out of my parent’s house, got into the workforce to pay the bills, and took classes whenever I could. The pace was slow. I did not graduate from community college with an Associate’s Degree in General Studies until 2007. With many detours along the way I graduated with much more than two years worth of credits, and even though much of this school work was in nontransferable computer classes the lessons from this curriculum has nonetheless been invaluable for building my own personal human capital.

I graduated from Eastern Oregon University (EOU) in 2010, Summa Cum Laude, with a B.S. in Philosophy, Politics, and Economics. I was humbled with the Outstanding Student of Philosophy Award, an academic achievement that surprised me, since for a while there I doubted that I would even complete a four year degree. It wasn’t easy. I continued to work fulltime, and took distance classes online. Before you judge the merits or difficulty of distance education, consider that EOU has a normal campus and the curriculum I experienced would have been exactly the same for those onsite, just with more facilities and easier access to professors and other students. It took me thirteen years to complete the first two years of my college education, but it took me only three more years to complete my four year degree. It took me the time a newborn must wait before legally driving, but I did finish with a much faster and dedicated pace at the end. I attribute this to my growing maturity, an awareness of the skills I was lacking for the kind of work I wanted to do, and a real enthusiasm for the subjects I studied.

Concerns About the Cost of College

The expense of a college education is high and growing much faster than prices more generally, with the derivative expenditures for debt financing going up along with tuition. The increasing demand for college educations is driving the upward momentum in costs, but demand is pushing against a wall of fairly fixed supply. Between 1983 and 2006 the price for attending college rose 150%, while incomes only rose 50% during that same time (Whaples). In economics prices can be explained in terms of supply and demand, and it is thought that when all other things are the same, the increase of a price will bring more suppliers to a market while also diminishing the demand, hopefully adjusting the price back to an equilibrium. Unfortunately this is not the way it works with college tuition.

The demand for college continues to increase along with price, because the return on a college investment is still positive in most cases. As long as higher education brings the rewards of higher pay and increased job security the demand for it will remain strong. In America the demand for college is driven by parents, whose incomes have increased over the years, and who want to see their children succeed, to climb the upward ladders of class mobility to higher levels than they did (Whaples). Technological changes and the invention of specialized equipment has created the need for specialized work with educations in technical trades, most notably the information worker revolution and the myriad of computer specializations. Government grants and subsidies also raise the demand for college, as the lowering of prices is oft to do. The demand for higher education continues to grow through a combination of cultural causes, driven most fundamentally by the simple fact that it still typically pays off in the end. This puts upward pressure on the price, as the law of demand suggests, all things the same, that an increase in quantity demanded puts upward pressure on prices.

The law of supply suggests, all things being equal, that an increase in prices from an increase in demand should encourage more suppliers to come to market, since higher demand for steady supply is profit growth. But alas for simple free markets, most good colleges and universities are not for-profit institutions, so the ceteris paribus clause in the law of supply is violated. The supply of higher education is restricted by many barriers to entry. Most students and parents want name brand educations from colleges with prestige, with lavish facilities. Universities replace the quest for profit with the quest for prestige, and it is this prestige that attracts the greater demand from parents and students, distorting the typical function of free market incentives. The supply for prestigious college educations is essentially fixed, with a nearly vertical supply curve. Consider our Ivy League elite. The rankings published by U.S. News and World Report are an important gauge of prestige for the public, leading to higher demand and greater alumni support, and the rankings calculation includes metrics like money spent per student and small class size (Whaples). This disincentivizes any attempts to keep costs down for colleges who seek to be prestigious, which is most of them.

The demand and supply incentives at work in higher education suggest that tuition costs will continue to trend higher, nevertheless, the value for this expense is still worth the cost in most cases. Businessweek and the Seattle firm PayScale calculate the 2012 return on investment (ROI) for a college education to average about $353,182 over a 30 year period, as measured against the median salary of those with only a high school diploma. When measured against the 75th percentile of high school only graduates, the ROI drops to only $152,114, a better comparison than the median, considering that non-students of the college caliber are more likely to command pay at the higher end. In one year the college ROI has dropped, because tuitions have increased by 6% and the return has dropped by 1%. The return depends on the school and the type of degree of course, with 191 colleges providing a negative ROI, Ivy League graduates averaging a $1 million return over 30 years, and engineering students fairing much better than liberal arts students. As it stands now, college is still a good investment, at least if you are one of the 59% of students that actually graduate. (Lavelle)

In the meantime, college costs continue to rise though. Currently the average tuition is $85,276 for four years (Lavelle), and for most people this requires some sort of financial aid. While I don’t personally have a student loan debt to pay back, my wife Mary and a lot of other young Americans do. Between 1993 and 2006 the number of college loans increased from 4 million to 9 million. Net commitments rose from $27 billion to $118 billion, education grants climbed from 3.8 million to 5 million, and the total increase in college spending was a whopping 80% over 13 years to reach $13 billion in 2006 (Whaples). A scholarship or grant would be nice, but most likely a prospective college student will need to obtain a loan and pay the additional interest, representing a real reduction in the ROI for this class of consumers. It is interesting to note that if you have wealthy parents who are able to save for your college, not only are you not burdened by the problem of paying back a loan, but the cost is cheaper because there is no debt financing needed. This creates a barrier to entry for the lower classes, impinging on the future of upward mobility.

Higher education is in the interests of the community, justifying the subsidies and student aid programs. Many of the arguments in favor of public funding for higher education are the same as those for lower level education, which I discussed in my recent article, Thinking About Public Education. Besides the goals of egalitarianism and equality of opportunity, there is an economic benefit behind the public support for colleges and universities. An increase of college graduates to an area is like the proverbial tide that lifts the boats, a positive externality, an optimistic spillover effect. If the number of college graduates in an area increases by 1%, it is estimated that on average the wages for high school graduates will increase by 1.6%, the wages for other college graduates will increase by 0.4%, and the wages for high school dropouts will increase by 1.9% (Whaples). Areas with a better educated citizenry not only attract the businesses that need their specialized skills and knowledge, the potential for innovation and entrepreneurship is enhanced. The institutions of higher learning in America are a significant source of economic dynamism for the world.

Conflicting Views

The idea of college being a form of human capital investment is not without controversy. It is a contention that higher education does not provide the promised ladders of upward mobility but perpetuates the class system by segregating students by background into vocation, general and elite schools and curriculum, thereby creating social stratification, not fixing it. The class conflict model argues that educated workers are desired by employers for reasons other than the special skills and knowledge, which can be acquired without college. The resolve and restraint required to graduate from college, the institutions of conformity, compliance, and self-control are the real traits that employers prefer when they select for college credentials over the other ways in which skill and knowledge might be demonstrated. University degrees are a type of market signaling, a way to reduce the asymmetric information faced by employers who seek to hire intelligent, yet dutiful and loyal employees, who value structure and hierarchies before independence. In this view, college serves an elite and corporate agenda.

A complaint about college graduates that I have recently been hearing more of would seem to disagree with the class conflict model. That is, more and more students choose useless degrees that do not have much practical value in today’s job market. Liberal arts degrees are expensive but do not add much economic value. Specialists in film art and poetry are just not what the world needs right now, so a big problem with higher education is the way it caters to the whims of students who are told to pursue their dreams when they don’t even know what they want. Critics of college subsidies might argue on ending these programs on the grounds that there are no productivity gains from studying literature. I agree with this sentiment to some extent, I don’t see this as a large problem or strong argument against higher learning in principle, especially since the average college ROI is still positive.

Conclusion

I am comforted by the fact that I have acquired a college education. The unemployment rate for those with a Bachelor’s degree was only 4% in April 2012 compared to 8.1% unemployed overall (BLS). Job security and higher pay are still features of educational achievement, and I am banking that my academic investment will pay dividends in the future. I expect to re-enter the job market in about a year or so, and if nothing else, having a college degree mitigates some of my trepidation and anxiety about this circumstance. The economics portion of my education has been especially helpful for my forecasting and analytical work, but my acquired knowledge of philosophy and political science is more useful for the business environment than it might seem. Critical reasoning and diplomacy are essential traits for a corporate knowledge worker in the 21st century. I find value in the credentials I obtained by graduating college, but I find even more value in the true acquisition of knowledge I experienced along the way. I believe the college investment is still worth it.

Jared Roy Endicott


Cochran, Charles L., and Eloise F. Malone. Public Policy: Perspectives and Choices. Third Ed. Boulder, CO: Lynne Rienner Publishers, 2005. Print.

Lavelle, Louis. “College ROI: What We Found”. Bloomberg Businessweek. 9 Apr 2012. Web. 17 May 2012.

Whaples, Robert. “Higher Education—Supply and Demand.” Modern Economic Issues. Chantilly, Virginia: The Great Courses, The Teaching Company, 2007. Video.


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