But even Andy’s performance suffers compared with the return on investment from a college degree. According to repeated analyses by economists at the Federal Reserve Bank of New York, a four-year degree generates an annual return of 14 percent over a 40-year career.
You don’t need a Princeton diploma to beat the Princeton endowment. Any good bachelor’s degree will do the trick. Indeed, it is hard to conceive of a more reliable and cost-effective investment than attending and completing college.
And yet 56 percent of Americans today don’t think a college degree is “worth the cost,” according to a survey by the Wall Street Journal and the independent research institute NORC at the University of Chicago. The same survey 10 years ago found that 40 percent of Americans felt that way, which means faith in the value of college in this country is plummeting, even as the actual value remains incredibly strong.
Jaison Abel, an economist who co-authored the New York Fed research with his colleague Richard Deitz, told Princeton that the collective failure to appreciate the value of a college degree reflects information frictions and various cognitive biases, or systematic errors people make in processing information.
One of them is “hyperbolic discounting,” in which people overstate upfront costs and discount future payoffs. It doesn’t help that higher education has a complicated pricing model, based on tuition rates that only a minority of students pay in full. Most undergraduates are offered financial aid or other discounts. According to a College Board study, an average year of public or private college today costs less than it did five years ago, despite rising sticker prices.
(The average annual total cost — including tuition, room and board — to attend Princeton for the more than 60 percent of students who receive financial aid will drop to $12,000 next year, thanks largely to our endowment. And about a quarter of our students will pay nothing to attend. That’s an argument for strong endowments, by the way.)
Other cognitive biases that contribute to Americans’ tendency to undervalue the college degree are the “availability” and “recency” biases, in which people are overinfluenced by readily available and recently received information, even if it’s less reliable. Odds are that the most recent economic information you’ve received about colleges isn’t the astonishing value of a college diploma.
More likely, you’ve read stories equating college attendance with crushing student loan burdens (not true for most borrowers), a weakening job market for new grads (true, but better than the market for non-grads) and rising tuitions (nominally true, but again, the actual cost has been going down at public and private colleges).
To be sure, a college education is expensive and complicated to deliver, there’s a lot of variety in higher education and there are far too many underperforming institutions. The for-profit college sector is notorious for aggressively marketing to low-income and military-affiliated students while producing low graduation rates and high student loan defaults. Too many public and nonprofit colleges fail to graduate students they enroll. The economic returns of a college degree all but vanish for students who don’t complete their education — and they erode quickly for students who take more than four years to finish.
These problems need to be attacked and addressed — by cracking down on bad actors, by expanding Pell grants and other financial supports to low-income students, and by increasing transparency about completion rates and costs so students can make better decisions.
But students, their families and the public are ill-served by the caricaturing of an American college education as an economically questionable proposition when the opposite is true. When we overstate the economic risks of going to college, we risk robbing students and their families of the investment opportunity of a lifetime — and that hurts us all.
