What's Happening to the "College Premium"?

American economists call the wage gap between college graduates and others the "college premium." If you go back to the 1960s, the premium was about 30%; college graduates earned, on average, 30% more than high school grads. In the 1980s the gap grew to 60%, where it has remained ever since. 

But a recent study by some Federal Reserve economists asked a different question: what about wealth? (NY Times) If you look at the wealth accummulated by college grads vs. others, there isn't much difference at all. Nobody has looked in detail at why that is, but one obvious factor is student loan debt. The average debt for people who graduate from four-year colleges right now is around $30,000, and many owe much more. I suspect another factor might be housing costs, because a larger percentage of college grads live in big, expensive cities.

Anyway this complicates the picture of whether college is worth it financially. Polls show that this reality is already changing how people think about college. The percentage of young Americans who think college is very important for getting ahead has falled from 74% in 2010 to 41% now. The percentage of high school graduates going straight to college has also fallen, from nearly 70% to 62%.

The Times found somebody who has done some interesting math:

If your tuition is free and you can be absolutely certain that you’re going to graduate within six years, then you enter college with a 96 percent chance that your gamble is going to pay off, meaning that your lifetime earnings will be greater than those of a typical high school graduate.

The problem, though, is that many students who start college don’t graduate — about 40 percent of them, by one estimate. When Webber factors in that risk, your chances of coming out ahead of the typical high school grad start to shrink. If tuition is still free, you now have about a 3 in 4 chance of winning the bet.

The second problem is that going to college isn’t free. If you’re paying $25,000 a year in tuition and expenses, Webber calculated, your chance of coming out ahead drops to about 2 in 3. At $50,000 a year in college costs, your odds are no better than a coin flip: Maybe you’ll wind up with more than the typical high school grad, but you’re just as likely to wind up with less.

Webber next considered the impact of a student’s major. If you choose a business or STEM degree, your chance of winning the college bet goes back up to 3 in 4, even if you’re paying $50,000 a year in tuition and expenses while you’re in college. But if you’re majoring in anything else — arts, humanities or social sciences — your odds turn negative at that price; worse than a coin flip. In fact, if your degree is in the arts or humanities, you’re likely to lose the bet even if your annual college expenses are just $25,000.

According to this arithmetic, the average humanities major loses money by going to college, although much of what drives that is the 40% who never finish.

Right now, the economics of higher education are just abysmal. I don't, though, know what to do about it. Spending more government money appeals to me, but we are running a Federal budget deficit that makes even me nervous and raising taxes seems close to impossible. I think there are ways to reduce the cost of college, but they would involve making it a lot less pleasant for everyone, including all the adjuncts who would be teaching at these bare-bones colleges I imagine.

Of course, some of the turn against education has to do with ideology; in fact most of the people who have changed their minds about whether college is a good thing are conservatives. I think that is foolish, but it is only what you would expect when liberal college professors outnumber conservatives 5 to 1; among administrators, it's 12 to 1. That also strikes me as a very hard thing to change, since the pool of graduate students is probably even more skewed toward liberals. In the past defenders of the universities simply told conservatives, "Who cares about ideology? If you want to be successful you have to go to college." But if the headline economic numbers really are shifting, what will the defense be?

Here is my plan, such as it is: reduce the number of places in four-year colleges and use the savings to cut tuition. Send everyone else to community college, which is a lot cheaper, but insure that anyone who graduates from community college with a good GPA gets automatic admission to a four-year state school. (That is already the case in Maryland.) Drastically limit student loan debt, which will force most colleges to cut costs. And hope for the best.