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A College Degree Does Not Make You a Million Dollars – Article by Andrew Syrios

A College Degree Does Not Make You a Million Dollars – Article by Andrew Syrios

The New Renaissance Hat
Andrew Syrios
April 13, 2014

It is becoming substantially less difficult these days to convince people that college is not a sure fire way to the good life. Even Paul Krugman has conceded that “it’s no longer true that having a college degree guarantees that you’ll get a good job.” You can say that again: 53 percent of recent graduates are either jobless or underemployed. Unfortunately, myths die hard. Many people still believe as Hillary Clinton once said, “Graduates from four-year colleges earn nearly an estimated one million dollars more [than high school graduates].” This may sound convincing, but this figure — based on a Census Bureau report — is about as true as it is relevant.

After all, isn’t it true that the most hard-working and intelligent people tend more to go to college? This is not a nature vs. nurture argument, the factors behind these qualities are unrelated to the discussion at hand. If one grants, however, that the more ambitious and talented go to college in greater proportion than their peers, Mrs. Clinton could have just said “the most hard-working and intelligent earn nearly an estimated one million dollars more than their peers.” I think the presses need not be stopped.

For one thing, the Census Bureau estimate includes super-earners such as CEO’s which skew the average upward. Although some, such as Mark Zuckerberg and Bill Gates, didn’t graduate college, most did. This is why it’s better to use the median (the middle number in the data set) than the mean or average. It’s also why Hillary Clinton and other repeaters of this factoid don’t.

Furthermore, just because most smart people go to college doesn’t mean they should. They may earn more money, but what they keep is more important than what they make. Financial columnist Jack Hough created a very illuminating hypothetical scenario with two people, one who chooses college and one who enters the labor force after high school. Hough then uses the average cost of college as well as U.S. Census Bureau data for the average income of college graduates and non-graduates, adjusted for age. He assumes both save and invest 5 percent of their income each year. By the age of 65, how does the net worth of each look?

  • College Graduate: $400,000
  • High School Graduate: $1,300,000

When one thinks about the common narrative of college vs. no college, it truly becomes absurd. Indeed, who exactly are we comparing? We’re not only comparing Jane-Lawyer to Joe-Carpenter, but we’re also comparing financial analysts with the mentally disabled, medical doctors with welfare dependents, building engineers with drug addicts, architects with pan handlers, marketing directors with immigrants who can barely speak English, and university professors with career criminals (whose earnings, by the way, are rarely reported). Many of these troubled people didn’t graduate high school, but it is shocking how they shuffle kids through the system these days. Some 50 percent of Detroit high school graduates are functionally illiterate and it isn’t that much better for the country on the whole. And something tells me that these particular non-graduates need something other than four years of drinking and studying Lockean (well, more likely Marxian) philosophy.

It certainly could be a good thing to earn a college degree. If one wants to be an accountant, engineer, or doctor, a degree is required. And those jobs have very high incomes. But can one really expect to make a killing with a degree in sociology or Medieval-African-Women’s-Military-Ethnic Studies? Pretty much the only jobs those degrees help one get, in any way other than the “hey, they got a college degree” sort of way, are jobs teaching sociology or Medieval-African-Women’s-Military-Ethnic Studies. And that requires an advanced degree as well (i.e., more money down the tube).

Furthermore, a college degree does not even guarantee a particularly high income. CBS News ran an article on the 20 worst-paying college degrees. The worst was Child and Family Studies with a starting average salary of $29,500 and a mid-career average of $38,400. Art History came in 20th with a starting average of $39,400 and a mid-career average of $57,100. Other degrees in between included elementary education, culinary arts, religious studies, nutrition, and music.

These are decent salaries, but are they worth the monetary and opportunity costs? With the wealth of information on the Internet, many skills can be attained on one’s own. Alternatives to college such as entrepreneurship and apprenticeship programs are often ignored. Indeed, apprentices typically get paid for their work while they are learning. The average yearly wage of a plumber and electrician are $52,950 and $53,030 respectively. That’s better than many college degrees and comes without the debt.

And that debt is getting bigger and bigger as college tuition continues to rise. In the last five years, tuition has gone up 24 percent more than inflation. Including books, supplies, transportation and other costs, in-state college students paid an average of $17,860 for one year in 2013 (out-of-state students paid substantially more). And despite all of that, many students don’t even finish. According to US News & World Report,

Studies have shown that nonselective colleges graduate, on average, 35 percent of their students, while the most competitive schools graduate 88 percent. Harvard’s 97 percent four-year graduation rate might not be that surprising … [but then] Texas Southern University’s rate was 12 percent.

12 percent is simply ridiculous, but the 35 percent for nonselective schools is extremely bad as well. Even the 88 percent for competitive schools leaves 12 percent of their students with no degree, but plenty of debt.

Given all of that, it can’t be surprising that the default rates on student loans (which cannot be wiped away in bankruptcy) appear to be much higher than is typically reported. According to The Chronicle,

[O]ne in every five government loans that entered repayment in 1995 has gone into default. The default rate is higher for loans made to students from two-year colleges, and higher still, reaching 40 percent, for those who attended for-profit institutions …

[T]he government’s official “cohort-default rate,” which measures the percentage of borrowers who default in the first two years of repayment and is used to penalize colleges with high rates, downplays the long-term cost of defaults, capturing only a sliver of the loans that eventually lapse …

College is good for some people. If you want to go into a field that has high earning potential (engineering, medicine, accounting, etc.) or you really like a certain subject and want to dedicate your career to it even if it may not be the best financial decision, go for it. But don’t go to college just because as Colin Hanks says in Orange County, “that’s what you do after high school!”

Andrew Syrios is a Kansas City-based real estate investor and partner with Stewardship Properties. He also blogs at See Andrew Syrios’s article archives.

This article was published on and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Federal Student Aid and the Law of Unintended Consequences – Article by Richard Vedder

Federal Student Aid and the Law of Unintended Consequences – Article by Richard Vedder

The New Renaissance Hat
Richard Vedder
July 8, 2012

RICHARD VEDDER is the Edwin and Ruth Kennedy Distinguished Professor of Economics at Ohio University and director of the Center for College Affordability and Productivity. He received his B.A. from Northwestern University and his M.A. and Ph.D. in economics from the University of Illinois. He has written for the Wall Street Journal, National Review, and Investor’s Business Daily, and is the author of several books, including The American Economy in Historical Perspective and Going Broke by Degree: Why College Costs Too Much.

The following is adapted from a speech delivered on May 10, 2012, at Hillsdale College’s Allan P. Kirby, Jr. Center for Constitutional Studies and Citizenship in Washington, D.C.

Reprinted by permission from Imprimis, a publication of Hillsdale College.

FEDERAL STUDENT financial assistance programs are costly, inefficient, byzantine, and fail to serve their desired objectives. In a word, they are dysfunctional, among the worst of many bad federal programs.

These programs are commonly rationalized on three grounds: on the grounds that assuring more young people a higher education has positive spillover effects for the country; on the grounds that higher education promotes equal economic opportunity (or, as the politicians say, that it is “a ticket to achieving the American Dream”); or on the grounds that too few students would go to college in the absence of federal loan programs, since private markets for loans to college students are defective.

All three of these arguments are dubious at best. The alleged positive spillover effects of sending more and more Americans to college are very difficult to measure. And as the late Milton Friedman suggested to me shortly before his death, they may be more than offset by negative spillover effects. Consider, for instance, the relationship between spending by state governments on higher education and their rate of economic growth. Controlling for other factors important in growth determination, the relationship between education spending and economic growth is negative or, at best, non-existent.

What about higher education being a vehicle for equal economic opportunity or income equality? Over the last four decades, a period in which the proportion of adults with four-year college degrees tripled, income equality has declined. (As a side note, I do not know the socially optimal level of economic inequality, and the tacit assumption that more such equality is always desirable is suspect; my point here is simply that, in reality, higher education today does not promote income equality.)

Finally, in regards to the argument that capital markets for student loans are defective, if financial institutions can lend to college students on credit cards and make car loans to college students in large numbers—which they do—there is no reason why they can’t also make student educational loans.

Despite the fact that the rationales for federal student financial assistance programs are very weak, these programs are growing rapidly. The Pell Grant program did much more than double in size between 2007 and 2010. Although it was designed to help poor people, it is now becoming a middle class entitlement. Student loans have been growing eight to ten percent a year for at least two decades, and, as is well publicized, now aggregate to one trillion dollars of debt outstanding—roughly $25,000 on average for the 40,000,000 holders of the debt. Astoundingly, student loan debt now exceeds credit card debt.

Nor is it correct to assume that most of this debt is held by young people in their twenties and early thirties. The median age of those with loan obligations today is around 33, and approximately 40 percent of the debt is held by people 40 years of age or older. So when politicians talk about maintaining low interest loans to help kids in college, more often than not the help is going to middle-aged individuals long gone from the halls of academia.

With this as an introduction, let me outline eight problems with federal student grant and loan programs. The list is not exclusive.

(1) Student loan interest rates are not set by the forces of supply and demand, but by the political process. Normally, interest rates are a price used to allocate scarce resources; but when that price is manipulated by politicians, it leads to distortions in the use of resources. Since student loan interest rates are always set at below-market rates, too much money is borrowed for college. Currently those interest rates are extremely low, with a key rate of 3.4 percent—which, after adjusting for inflation, is approximately zero. Moreover, both the president and Governor Romney say they want to continue that low interest rate after July 1, when it is supposed to double. This aggravates an already bad situation, and provides a perfect example of the fundamental problem facing our nation today: politicians pushing programs whose benefits are visible and immediate (even if illusory, as suggested above), while their extraordinarily high costs are less visible and more distant in time.

(2) In the real world, interest rates vary with the prospects that the borrower will repay the loan. In the surreal world of student loans, the brilliant student completing an electrical engineering degree at M.I.T. pays the same interest rate as the student majoring in ethnic studies at a state university who has a GPA below 2.0. The former student will almost certainly graduate and get a job paying $50,000 a year or more, whereas the odds are high the latter student will fail to graduate and will be lucky to make $30,000 a year.

Related to this problem, colleges themselves have no “skin in the game.” They are responsible for allowing loan commitments to occur, but they face no penalties or negative consequences when defaults are extremely high, imposing costs on taxpayers.

(3) Perhaps most importantly, federal student grant and loan programs have contributed to the tuition price explosion. When third parties pay a large part of the bill, at least temporarily, the customer’s demand for the service rises and he is not as sensitive to price as he would be if he were paying himself. Colleges and universities take advantage of that and raise their prices to capture the funds that ostensibly are designed to help students. This is what happened previously in health care, and is what is currently happening in higher education.

(4) The federal government now has a monopoly in providing student loans. Until recently, at least it farmed out the servicing of loans to a variety of private financial service firms, adding an element of competition in terms of quality of service, if not price. But the Obama administration, with its strong hostility to private enterprise, moved to establish a complete monopoly. One would think the example of the U.S. Postal Service today, losing taxpayer money hand over fist and incapable of making even the most obviously needed reforms, would be enough proof against the prudence of such a move. And remember: because of highly irresponsible fiscal policies, the federal government borrows 30 or 40 percent of the money it currently spends, much of that from overseas. Thus we are incurring long-term obligations to foreigners to finance loans to largely middle class Americans to go to college. This is not an appropriate use of public funds at a time of dangerously high federal budget deficits.

(5) Those applying for student loans or Pell Grants are compelled to complete the FAFSA form, which is extremely complex, involves more than 100 questions, and is used by colleges to administer scholarships (or, more accurately, tuition discounts). Thus colleges are given all sorts of highly personal and private information on incomes, wealth, debts, child support, and so forth. A car dealer who demanded such information so that he could see how badly he could gouge you would either be out of business or in jail within days or weeks. But it is commonplace in higher education because of federal student financial assistance programs.

(6) As federal programs have increased the number of students who enroll in college, the number of new college graduates now far exceeds the number of new managerial, technical and professional jobs—positions that college graduates have traditionally taken. A survey by Northeastern University estimates that 54 percent of recent college graduates are underemployed or unemployed. Thus we currently have 107,000 janitors and 16,000 parking lot attendants with bachelor’s degrees, not to mention bartenders, hair dressers, mail carriers, and so on. And many of those in these limited-income occupations are struggling to pay off student loan obligations.

Connected to this is the fact that more and more kids are going to college who lack the cognitive skills, the discipline, the academic preparation, or the ambition to succeed academically. They simply cannot or do not master well much of the rather complex materials that college students are expected to learn. As a result, many students either do not graduate or fail to graduate on time. I have estimated that only 40 percent or less of Pell Grant recipients get degrees within six years—an extremely high dropout or failure rate. No one has seriously questioned that statistic—a number, by the way, that the federal government does not publish, no doubt because it is embarrassingly low.

Also related is the fact that, in an attempt to minimize this problem, colleges have lowered standards, expecting students to read and write less while giving higher grades for lesser amounts of work. Surveys show that students spend on average less than 30 hours per week on academic work—less than they spend on recreation.  As Richard Arum and Josipa Roksa show in their book Academically Adrift: Limited Learning on College Campuses, critical thinking skills among college seniors on average are little more than among freshmen.

(7) As suggested to me a couple of days ago by a North Carolina judge, based on a case in his courtroom, with so many funds so readily available there is a temptation and opportunity for persons to acquire low interest student loans with the intention of dropping out of school quickly to use the proceeds for other purposes. (In the North Carolina student loan fraud case, it was to start up a t-shirt business.)

(8) Lazy or mediocre students can get greater subsidies than hard-working and industrious ones. Take Pell Grants. A student who works extra hard and graduates with top grades after three years will receive only half as much money as a student who flunks several courses and takes six years to finish or doesn’t obtain a degree at all. In other words, for recipients of federal aid there are disincentives to excel.

* * *
If the Law of Unintended Consequences ever applied, it is in federal student financial assistance. Programs created with the noblest of intentions have failed to serve either their customers or the nation well. In the 1950s and 1960s, before these programs were large, American higher education enjoyed a Golden Age. Enrollments were rising, lower-income student access was growing, and American leadership in higher education was becoming well established. In other words, the system flourished without these programs. Subsequently, massive growth in federal spending and involvement in higher education has proved counterproductive.

With the ratio of debt to GDP rising nationally, and the federal government continuing to spend more and more taxpayer money on higher education at an unsustainable long-term pace, a re-thinking of federal student financial aid policies is a good place to start in meeting America’s economic crisis.