A new analysis of the costs and benefits of attending college demonstrates that a college degree is still an excellent financial investment. The study was conducted by three economists associated with the Federal Reserve Bank of St. Louis: Scott A. Wolla, Guillaume Vandenbroucke, and Cameron Tucker.
The authors first looked at the average annual cost of attending college in 1980, 2000, and 2020. After adjusting for inflation, they determined that in terms of 1980 dollars, attending college cost more than twice as much in 2020 ($8,798 per year ) as it did in 1980 ($3,499).
Next, they examined the financial benefits of going to college, including how much more money a person with a college degree earns than someone without one — the so-called college wage premium.
In each of the three cohorts (1980, 2000, 2020), workers with a college degree earned substantially more money annually than individuals with only a high school diploma. For each group, the college wage premium starts relatively small, but it increases as workers age and acquire more skills and experience.
For example, in 1980 new college graduates earned about $1,000 more a year than those with only a high school diploma; but, by mid-career, college-educated workers were earning about $10,000 more than high school-educated workers.
By contrast, in 2020, the differences in annual earning between the two education groups were much larger. In 2020, workers with a college degree earned nearly $5,000 more after graduation; but, by mid-career, college-educated workers were earning $18,000 more than high school-educated workers. These figures were also adjusted for inflation and are stated in 1980 dollars.
The Return On Investing In College
In 1980, the price paid for a college education, on average, was $13,996 ($3,499 multiplied by four). If you add up the additional income earned by these workers each year after graduation, the rate of return on the college costs was very large.
For example, a white woman who invested in a college education in 1980 could expect to make back in annual income the cost of her college education plus 21.6% —all of this in addition to the income she would have made without a college degree. By 2020, this rate increased to 22.7%, even after considering the greater costs of attending college.
For comparison’s sake, the rates of return on a college education in 2020 were: 24.1% for white men, 22.7% for white women, 14.2% for Black men, 13.5% for Black women, 35.9% for Asian men and 31.1% for Asian women.
What if, rather than going to college, people invested the money they would have spent on a college education in the stock market instead? In this scenario, workers probably would have lower wages, but their income would be boosted by gains realized in the invested funds.
According to the authors, “although the rates of return on a college education vary greatly across time, gender, and race, they are still considered higher than the returns on financial assets, such as stocks and bonds. For example, investing in the stock market has returned about 10% per year since 1957; in 2020, returns on a college education varied from 13.5% to 35.9%. By this measure, a college degree is an excellent investment.”
If anything, this analysis probably underestimates the ROI from a college degree because it’s looking only at those adults who are employed. It does not account for the fact that college-educated individuals experience lower rates of unemployment than those with a high school diploma. In 2021, the unemployment rate for college-educated individuals was 3.5%, almost half the rate (6.2%) for those who did not continue their education after high school.
The authors caution their analysis does not address non-financial outcomes such as work schedules, working conditions, or career satisfaction.
Nonetheless, they conclude a college education is still one of the best investments a person can make, citing the advice once given by former Federal Reserve Chair Ben Bernanke: “When I travel around the country, meeting with students, businesspeople, and others interested in the economy, I am occasionally asked for investment advice…. I know the answer to the question, and I will share it with you today: Education is the best investment.”
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