Commentary

Beyond the College Earnings Premium. Way Beyond.

André da Loba for The Chronicle

January 29, 2017

At a time of rising tuition, it is understandable that proponents of higher education trumpet the college earnings premium. Despite the rising cost, a college education is still practically a windfall-profit investment for most graduates. In 2012, Americans with bachelor’s degrees and without advanced degrees earned over $32,000 a year more than high-school graduates who never attended college.

Over an average lifetime, this premium is $1,383,000, conservatively assuming that the earnings premium does not continue to increase, as it has for decades. Moreover, with this financial payoff comes the value of substantially better health and longer life expectancy, the value of employer-provided fringe benefits such as health insurance and retirement plans, and the intrinsic lasting value of the college experience. Paying the full sticker price at an elite private college just for the average benefit is still a great investment.

But raising awareness of the college earnings premium has an important unintended side effect: It fuels the perception that a college education is primarily a private good — that the only beneficiaries are the individuals earning degrees. And if a college education is only a private good, then there is no need for public support of higher education. Private goods are effectively provided in free markets, and it is only fair that the beneficiaries should be the ones to pay.

The increasing belief that a college education is mostly a private good is apparent in American public-spending priorities. Despite rising college enrollment, the share of government spending devoted to higher education has been shrinking steadily since about 1980. Government spending on higher education as a fraction of national income has also been shrinking since the early 1980s. Taxpayer contributions to higher education relative to net student/family contributions have decreased substantially in recent decades. Our policy behavior speaks loudly that the perceived public value of a college education has been eroding.

And yet, higher education is clearly not just a private good. Knowledge creation from university research is an obvious public good. This suggests using tax dollars to support such research, if not necessarily to support college attainment.

There are important public benefits from college attainment, though. In addition to the great financial payoff to graduates, college attainment creates at least four important types of benefits for others:

Increased productivity. Given the college earnings premium, it is hardly surprising that regions of the country with higher proportions of college graduates have higher per capita incomes. The disparity, though, is substantially greater than can be explained by the higher incomes of the graduates. In other words, a college education seems to create more aggregate income than the sum of the higher incomes paid to graduates. It appears that a college education not only raises the productivity and income of those getting the degrees but also raises the productivity and income of others.

Fiscal support. It is also hardly surprising that college graduates pay substantially more taxes than those who did not go to college. Hence college graduates contribute more to the financing of public goods that benefit everyone. The magnitude of this effect may be surprising. Over an average lifetime, graduates with bachelor’s degrees but without advanced degrees pay $563,000 more in taxes than high-school graduates who never attended college.

College graduates also create less in government expenditures on public assistance and social insurance, thus benefiting others by freeing resources for other public services and/or reducing others’ taxes. Over an average lifetime, college graduates without advanced degrees receive $50,000 less in Medicaid, Supplemental Security Income, unemployment benefits, and other such benefits than do high-school graduates who never attended college.

The additional taxes and the reduction in the need for benefits that results from college attainment far exceed taxpayer support for higher education, making college a great investment for taxpayers as well. Moreover, just the reduction in transfer payments may exceed government spending on higher education, in which case public support for higher education may reduce the overall size of government.

Philanthropic participation. College attendance increases generosity significantly. College graduates without advanced degrees donate more than three times as much cash to charities each year as do high-school graduates who never attended college. The estimate errs on the low side because it not does include the value of noncash donations, posthumous gifts, or gifts to individuals. The greater earnings of college graduates accounts for roughly half of the additional cash donations. The other half comes from college graduates’ donating a higher proportion of their earnings to charity — 2.3 percent compared with 1.6 percent.

Volunteerism, too, increases significantly with college attainment. Working-age bachelor’s graduates without advanced degrees volunteer at 2.3 times the rate of high-school graduates who did not go to college. That puts total annual philanthropic contributions more than $3,600 — 4.7 times — higher per bachelor’s degree. Total average contributions are 4.1 percent of earnings for those with high-school diplomas, compared with 8.2 percent for those with bachelor’s degrees.

Civic engagement. College graduates are more-active participants in democracy, voting at higher rates and being more politically involved. They are also more active in their neighborhoods through participation in community organizations, working on community projects and attending community meetings. College-educated adults are also more likely to interact with their neighbors. In addition, they are less likely to be involved in criminal activities. In short, college education helps make our communities better places to live.

And these are just the measurable public benefits. Their combined value is probably greater than the college earnings premium, perhaps substantially so. The list does not include other vital public effects that are almost impossible to quantify, such as the positive influences on arts, culture, innovation, and tolerance.

It is not overstatement to call the typically emphasized effect on earnings just a small portion of the benefits of college attainment. Yet the financial payoff alone is too often portrayed as the sole benefit of college. Until this portrayal of what makes a college education worthwhile is changed, the longtime erosion of public support is likely to continue.

What’s more, access to a college education may well continue to be compromised, which makes not just the potential students who are deterred, but all of us, worse off.

Philip Trostel is a professor of economics and public policy at the University of Maine at Orono.