The notion that education pays and that better education pays better is taken for granted by almost everyone. For college professors like me, this is a very convenient idea, providing a high and growing demand for our services.
Unfortunately, the facts seem to disagree. A recent study by economists Stacy Dale and Alan Krueger showed that going to more selective colleges and universities makes little difference to future income once one accounts for the underlying ability of the student. Their work confirms other studies that find no financial benefit to attending top-tier schools.
It’s good to know that Harvard applicants can safely attend Boston University (my employer), and that better higher education doesn’t pay better. But does higher education pay in the first place? Not necessarily. Consider four equally talented 18-year-olds — Joe, Jill, Sue, and Matt.
Joe skips college and becomes a plumber. Jill goes to an expensive private college for four years, a medical school for four years, does a low-paying internship for two years followed by a low-paying residency for one year, and finally, 11 years after high school, gets a real job, as a general practitioner.
Sue and Matt both get bachelor’s degrees in education at the same college Jill attends, but Matt spends an extra two years after college getting his masters.
All four of these hypothetical kids settle down in Ohio, remain single, and retire at 62. At age 50, the peak earnings year for all four, Joe, the plumber, makes $71,685 (in today’s dollars). Sue, the teacher, makes $89,584. Matt, with the master’s degree, makes $103,250. And Jill, the doctor, makes $185,895. (All figures are based on earnings data by age, state and occupation.)
Who ends up with the higher lifetime spending power assuming Sue, Matt, and Jill had to borrow, at high prevailing interest rates, to pay tuition and cover living expenses while in school? I used ESPlanner, my company’s financial planning software. The program figures out each kid’s sustainable spending, taking account of education costs, foregone earnings, annual federal and state income taxes, annual payroll taxes, Social Security benefits, and Medicare Part B premiums.
Jill, the doctor, has the highest living standard. She gets to spend $33,666 a year from age 19 through 100. This is after paying all her taxes and Medicare Part B premiums.
Come again? Only $33,666? That’s a far cry from Jill’s peak earnings. Yes, but remember, Jill has only about 31 years of significant earnings to cover some 81 years of living. And when Jill works, she gets nailed by the taxman. At age 50, Jill pays 36 percent of her earnings in federal and state income taxes and payroll taxes.
Finally, Jill has a bucket load of student loans to repay at an assumed 5 percent real interest rate, which exceeds the assumed 3 percent real return she can safely earn on her savings.
Joe the plumber’s sustainable spending is almost as high — $33,243. Sue the teacher has less spending power — $27,608 — and Matt’s spending power is even lower, at $26,503. Too bad he didn’t run the numbers before sending in his grad-school application.
These examples are a far cry from an exhaustive study of the returns on investing in higher education. Still, the examples present a big red flag for those who pursue higher education solely for the money. And they raise a major question about government policy that promotes higher education as the sure path to economic success.
