A good financial return for a college education should not be assumed as it once was. Chances remain high that college will pay, but changes in tuition and labor markets are lowering the return and raising the risk it might not pay for all graduates. Higher and higher tuition, delays finding jobs and the course of study head a list of trouble spots to consider when making a college investment.
All the states have one and usually two public universities that offer the best opportunity to measure tuition inflation. Private colleges tend to have higher tuition than public colleges, but they are more likely to offer discounts to attract good students away from the less expensive public colleges. Competition for good students means the posted tuition at private colleges may not be a good measure of actual tuition paid, or its rate of increase. Public colleges are less likely to discount tuition than private colleges, which makes them a better measure of tuition increases.
Compare the 2002 tuition for the two largest state universities in each of the fifty states with the tuition of 2013. Some like the University of Arizona have tuition increases at rates that range up to five times the rate of inflation. For example, if the 2002 tuition of $ 2,490 at the University of Arizona increased by the rate of inflation until 2013, it would be $ 3,224.80. Instead it is $ 10,391, an increase of 317.31 percent, which is an annual compounded increase of 13.87 percent when the general inflation rate was 2.38 percent in the same years. (1)
The high percentage increase at the University of Arizona results partly from its relatively low 2002 tuition. The lower 2002 tuition exaggerates the percentage increase over the period but I can find 31 state colleges out of the hundred that have higher tuition than the University of Arizona. Take the University of Vermont. If its 2002 tuition of $ 8,994 increased by the rate of inflation until 2013, it would be $ 11,648.13. Instead it is $ 15,718, an increase of 74.76 percent, which is a annual compounded percent increase of 5.21 percent, one of the lower rates of increase of tuition for the 100 colleges reviewed.
All of the hundred colleges mentioned above had tuition increases higher than the 2.38 percent increase in the Consumer Price Index. All but seven had increases at least twice the rate of inflation; forty-nine had tuition increases at least three times the rate of inflation.
Wage for jobs that need BA degree skills need to go up as fast as tuition to avoid lowering the rate of return on a college education. The Bureau of Labor Statistics (BLS) identifies occupations and careers that need BA degree skills. (2)
In 2013, the Bureau of Labor Statistics reported 169 occupations that require BA degree skills with a combined 20.5 million jobs. The total includes 93 occupations with 10 million jobs that had a median wage increase above the inflation rate of 2.38 percent from 2002 to 2013. The median increase of the median wage for the 93 occupations was 2.9 percent. There were 32 occupations with 6.8 million jobs that had a median wage increase less than the inflation rate. The median increase of the median wage for the 32 occupations was 2.0 percent.
The remaining 44 occupations of the 169 do not have corresponding median wage data for 2013 because some occupations were defined in broader categories in 2002. For example, a nurse in 2002 was broken into four occupations in 2013: Registered Nurse, Nurse Anesthetists, Nurse Midwives, and Nurse Practitioners. Hence wage data is not reported for both years for 44 occupations that have 3.7 million jobs.
In sum, only three of the hundred colleges reviewed had tuition increases less than 4 percent a year, while only seven occupations of the 125 with data had median wage increases as high as four percent, and four of the seven were management occupations. The combination of tuition and wage changes over time assures a general decline in the rate of return on a BA degree.
Measuring the Decline
A few calculations help measure the decline. Someone entering the University of Arizona in 2002 had to pay $ 2,490 for a year’s tuition. At the time student loan interest was set at 4.06 percent. Using the 4.06 interest rate the total four-year investment would be $ 11,012.82 assuming tuition is paid in the fall and compounded once a year. [Computations are courtesy of the Excel FV spreadsheet function. Entries for the $ 11,012.82 are FV(.0406/1, 4, -$ 2,409, 0 ,1). ]
Someone graduating at age 22 in 2006 has 44 years to work and earn a return on the investment. If the $ 11,012.82 was invested in stocks and bonds and earned a 4.06 percent return over the 44 years it would be $ 65,525.86. To have the equivalent $ 65,525.86 because of a better job requiring college degree skills, it will be necessary to earn an extra $ 44.64 a month for the same 44 years. [Excel entries for the $ 65,525.86 are FV(.0406/12, 528, 0, -$ 11,012.82 ,1) and so on.]
Any amount above $ 44.64 and the return is above 4.06 percent. If the amount was $ 100 a month for 44 years the return would be 10.9 percent, a return higher than most long term stock returns or student loans.
However, compare that to what happens to someone entering the University of Arizona in 2013 when a year’s tuition jumped to $ 10,391. In the time between 2002 and 2013 the interest on college student loans has gyrated from a low of 3.4 to a high of 6.8 percent, but it was set at 3.86 percent for the 2013-2014 academic year. Using a 3.86 interest rate the total four-year investment will be $ 45,732.76, again assuming tuition is paid in the fall and compounded once a year.
If the $ 45,732.76 was invested in stocks and bonds and earned a 3.86 percent return over 44 years, as above, it would be $ 249,258.16. To have the equivalent $ 249,258.16 because of a better job requiring college degree skills, it will be necessary to earn an extra $ 179.58 a month for 44 years, a little over four times $ 44.64.
Any amount above $ 179.58 and the return will be greater than 3.86 percent, but any amount below $ 179.58 and the return is lower. If the amount was $ 100 as it was above the return drops to a paltry .67 percent.
Rapidly rising tuition during a period of stagnant wages has not slowed the tied of graduates. The number of working age adults with BA degrees keeps growing because current graduates are more than double the graduates from the 1970’s who are reaching retirement age. BA degree graduates total 48.7 million from June 1971 until the end of the academic year in 2012. If the two years yet to be reported have at least the same number as 2012, as seems likely, then 52.3 million working age adults have BA degrees. (3)
Some of the 52.3 million with BA degrees went on to get master’s degrees, doctorates and professional degrees. Subtracting the graduate and professional degrees from the total still leaves 28.2 million working age adults with BA degrees to fill the 20.5 million jobs in 2013 that need BA degree skills.
The growing number of people with BA degree skills raises the risk of delay to find higher wage career employment. Compare what happens with 10 years of delay. If the tuition was invested in stocks and bonds and earned 3.86 percent for 10 more years it would grow to $ 67,235.10. If the $ 67,235.10 was invested in stocks and bonds and earned a 3.86 percent return over 34 years, it would also be $ 249,258.16 as above. To have the equivalent $ 249,258.16 because of a better job for 34 years, it will be necessary to earn an extra $ 295.21 a month, more than six times the $ 44.64 from above. An additional $ 100 a month would be a negative return that would not earn the initial investment.
The chances remain good that college will pay, but individual decisions matter more than ever. I can find 65 occupations in the Occupational Employment Survey requiring no more than high school skills with employment just over 11 million people that have a median wage greater than $ 50,000. I expect some of the people in those jobs have college degrees, but it is likely their tuition money would be earning a higher return in the stock market. Allow me to repeat, a good financial return for a college education should not be assumed.
1) Tuition data is from the College Board
2) Occupational Employment Survey, BLS
3) Degree data from the Center for Education Statistics, US Department of Education
American Job Market