The College Board has recently published an interesting report entitled Education Pays 2010: The Benefits of Higher Education for the Individual and Society. As have similar reports in the past, this shows the enormous financial benefit to the individual of gaining a bachelor's degree (or higher) - as compared to someone who does not get a college degree. It also looks at a number non-financial benefits as a function of educational attainment - health, job satisfaction, unemployment rates, etc. All in all, a very interesting report that makes a good case for the benefits of post-secondary degrees.

A Chronicle of Higher Education article discusses some of the controversial elements of the report. However there is an additional aspect of the report that I have not seen mentioned that caught my attention. Without in any way challenging the report's conclusion that a college degree is highly desirable, comparing salary data from this report with similar data from the previous report in this series Education Pays 2007 leads to a somewhat less upbeat conclusion.

The salary data in the current report comes from 2008, that in the previous report, from 2005. Comparing the 2008 median earnings for bachelor's degree holders ($55700 in 2008 dollars) with similar numbers for 2005 ($50900 in 2005 dollars), we see a percentage increase in median earnings of 9.4%. Unfortunately, the Bureau of Labor Statistics data tells us that the CPI increased 10.2% over that period. That is, adjusting for inflation, one sees that the median real earnings for bachelors degree holders decreased over this three year period by about 0.7%.

Unfortunately, this trend in real income for bachelor's degree holders is not an artifact of the recent financial downturn. As I discussed in an earlier post Real income vs educational level - a problem for higher education(July 25, 2007), mean real income of bachelor's degree holders fell by almost 4% during the period 2000-2005, and lifetime expected real income for bachelor's holders has been essentially flat since 1979, declining by about 1%. Thus, for all intents and purposes, the median real income for a bachelor's degree holder has been flat for the last 30 years.

Figure 1.6 of Education Pays 2010 shows related data over the period 1971-2008 for workers 25-34 years of age by gender and educational level. From that figure, this long term stability of real median income for bachelor's holders is obvious- as is the reality that the real median income for everyone with less than a bachelor's degree has seen a large and steady drop over time. Thus median financial benefits to bachelor's degree holders have not increased in real terms over times, but only in comparison with those who do not hold at least a bachelor's degree.

It is interesting to compare these results regarding the essentially constant median financial benefits of a college degree with the rising costs of obtaining that degree. The College Board's Trends in College Pricing 2009, tells us that average published real tuition and fees at private colleges went up 7.7% and at public institutions, 9.8% during the period 2005-2008, the times between the two Trends reports.Thus, the cost of the degree was rising in the upper double digits, while the returns on the degree dropped by about .7%.

Over the longer term, using the data from Trends again, one finds that the average published real tuition and fees has increased over the 30 year period 1979-2009 for private institutions by 154%, and for public institutions, 186%. Of course, one can argue that actual tuition and fee increases were not really that large because of grants, etc, and that is certainly the case. However, I argued in Perspectives on the elephant of college pricing that the actual increase in price to the student is probably at least half of the published increase- still a very large number. It is a particularly large number given that the median real economic value of the degree has been flat. Overall, on average, people are having to invest more each year to get a return that is essentially constant in real dollars - a falling return on investment.

Of course, all this is about medians and averages. The Education Pays reports also give information on the distribution of incomes around the medians, and it is quite broad. At the upper end of the distribution, the 75th percentile for bachelor's holders lies above the median for master's degrees, very close to the median for Ph.D's; at the lower end, the 25th percentile of the distribution lies near the middle of the distribution for high school graduates. Thus many of the economic conclusions that one might reach looking just at median incomes become much less sharp and clear if one looks at the breadth of the distributions.

All of this taken together suggests that a dropping return on investment driven by continually rising tuitions is creating a situation in which it eventually will no longer make financial sense to get a college degree - except for graduates that manage to get jobs that pay above the median (we might call them the Lake Wobegon group).

For better or for worse, there are ways for a student to increase the probabilty of being in the Wobegon group. PayScale puts out an annual College Salary Report that demonstrates quite clearly that median starting salaries for college graduates vary greatly by subject of degree and by institution of degree. Thus, not surprisingly, the actual return on investment is likely to be be influenced greatly by the traditional variables of discipline and institution. Attention to these variables is likely to become increasingly important to students and their families as the median return on investment of a college education continues to decline

Thus when I read the College Board report, I was delighted to see all the good things that correlated with college degrees. I also was intrigued to see that for 35 years or more, employers have defined the real annual median financial worth of the bachelor's degree to be essentially constant - despite the enormous changes in number and demographics of bachelor's recipients over that time, and the growth of the knowledge economy. But I was troubled to see that the median real return on investment of a bachelor's degree continues to fall in a monotonic fashion due to continuing increases in the cost of attending college. This, coupled with the broad distribution of incomes around the mean for bachelor's recipients, suggests that a time will arrive when it clearly will make no financial sense to get a bachelor's degree unless one both studies a field that is likely to lead to a well paying job and attends an institution highly regarded in that field. That will certainly cause some changes in higher education as we know it!