Is a college education an investment or a gamble? It depends on the type of student.
Learner analyzed data from the General Social Survey, Census Bureau, Tax Foundation and more sources to estimate the ROI for a college education.
Better to have studied than not at all
Considering not everyone who enters college gets a degree, would even an attempt at graduating make a difference? Yes, says a different analysis by Stacker using GSS data, which incorporates educational background and a measure of academic ability in the form of a miniature vocabulary quiz called Wordsum. Even when college students drop out, it is likely they will earn more than their peers who never went at all.
Part of what colleges do is filter for people who are already bright. By including a measure of academic ability, this analysis limits the credit given to colleges for the earnings of their future graduates. It also helps account for the fact that people with high academic ability tend to have better career options than those who don't, regardless of what diplomas they might hold.
GSS data shows that both the educational credentials a person has and their academic fitness—as measured by a short vocabulary quiz—matter when it comes to earnings. For example, a person who scored a 5 out of 10 on the Wordsum quiz can be expected to have a family income of around $65,000 a year if they graduated from high school but never went to college, $69,000 if they went to college but did not graduate, and $105,000 if they earned a bachelor's degree.
The fact that college graduates earn so much more than their peers who dropped out, even controlling for academic ability (as measured by Wordsum), could be partly because they are above average on some traits outside of those measured by the data. It also suggests employers value college degrees. To paraphrase Bryan Caplan, a high schooler who goes on to earn a bachelor's degree in underwater basket weaving will likely earn much more money than their equally intelligent peers who never went to college. Graduating is the hard part.
One of the biggest barriers to higher education (and, consequently, graduation) is the cost.
An October 2021 Pew Research Center survey found that roughly 3 in 5 U.S. adults do not have four-year college degrees mainly because they couldn't afford them. Another major reason was that they needed to work and support their families instead of finishing their education. One way some students have navigated this has been by applying to multiple colleges—some are more generous with their financial aid packages than others. This analysis, however, assumes students on average are paying the same as their peers. Anyone who pays full price for a four-year degree at a private college will have a much harder time getting a positive financial return on their tuition.
One's field of study also matters. While this analysis doesn't break college graduates by their majors, a recent study with a similar methodology by Liang Zhang of New York University and two other scholars does. In general, Zhang's study found that engineering and computer science majors produce the best rates of return, exceeding 13%. Business, health, math, and science degrees followed with IRRs between 10% to 13%. Behind them are degrees in biology and social science, which typically return between 8% and 9%. Education and humanities produced the lowest IRRs, especially for men. However, their numbers are adjusted for inflation and do not factor in dropout rates.
Wages for high school graduates are on the rise
The economy is an ever-changing landscape and many things have shifted rapidly. Many recent developments have whittled away at the return on a college degree.
Pay for blue-collar jobs has been rising faster than pay for white-collar jobs. This increases the opportunity cost of college and lowers the ROI on degrees. For example, California enacted legislation in April 2024 requiring a $20 per hour minimum wage for fast-food workers. A person who eschews the job at McDonald's to go to college for four years would effectively be giving up $166,400 in pretax earnings, assuming they did not work while they studied.
Another major development is that interest rates have skyrocketed. Federal student loans for undergraduates now have a 6.53% interest rate, up from a low point of 2.75% in 2020, according to Federal Student Aid. Anyone who takes loans to go to college should know they could end up paying a lot more interest than people who went to college just a few years prior.
Despite these trends, college still has one more argument in its favor: leverage. Not many people would lend thousands of dollars to an 18-year-old to buy stocks, regardless of what the math says. But the federal government will happily lend money to that exact same 18-year-old if they want to spend it on tuition. A low financial return is better than none at all.
Conventional financial theory suggests that if the expected ROI is lower than the cost of financing, companies should pass on the project. Recent economic trends have made the decision to go to college harder than ever. College may still be a good investment, but only for the well-prepared.
Story editing by Carren Jao. Additional editing by Kelly Glass. Copy editing by Paris Close. Photo selection by Clarese Moller.
This story originally appeared on Learner and was produced and distributed in partnership with Stacker Studio.
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