in Musings

Why the “College Grads Earn More” Statistic is Flawed

There are lies, damned lies, and statistics.

It’s a statistic everyone has heard of at some point in their life: college graduates earn more than high school graduates. A Google search of the phrase ‘college grads earn more’ leads to over 1 billion hits. Numerous studies have been conducted, and they all seem to reach the same conclusion. The most recent study as of writing this is from the Federal Reserve Bank of San Francisco, which alleges that college graduates earn $800,000 more in their lifetime than high school graduates. The study does come with a caveat, though. College grads won’t see the fruits of their labour until age 40 – when their student loans are paid off and they begin to amass enough work experience that their earnings elevate above their high-school grad peers.

I had some free time, so I decided to actually take a closer look. There are a number of issues I have with this study.

1. Most apparent, the study was conducted by the Federal Reserve Bank of San Francisco. This is an institution that literally makes its money by issuing student loans, which is over a $1 trillion market. It would be naive to believe that the Fed would ever tell prospective college students not to take out student loans. Similarly, I’ve found that other studies of this nature are almost always presented by an institution that benefits from kids going to college. A 2011 report from Georgetown University titled “The College Payoff” proclaims that college is indeed worth the payoff. But again, this is a university that is issuing the study. It’s akin to an alcoholic citing the numerous benefits of drinking alcohol. There is an enormous bias before these studies are even conducted. It is very easy to manipulate numbers in a way that presents a certain side of a story, and it’s evident some of this was at play when you look at the models, as I explain below.

2. The study blatantly ignores the cost of living in its calculation. As stated here: “We calculate the cost of college as four years of tuition plus the earnings missed from choosing not to enter the workforce.” There is no mention of rent, textbooks, dining, entertainment, alcohol, and whatever else college students pay for. All of this can easily add up to close to 100% of the cost of tuition, especially if you go to school in a major city. These costs would push back the breakeven point of college from 40 years old to at least 50.

3. The study assumes 4 years of tuition – the actual average graduation rate is now 5-6 years. Small detail, yes, but it does affect the end result if only slightly.

4. The study uses data from the 1990s and 2000s for the tuition costs. Unfortunately, college tuition has risen steadily every year. From 2008-2013, prices rose by 27 percent above inflation. The NY Times has also recently estimated that the price of college has tripled between now and 1980. The study is thus using historical data from 10-20 years ago to make conclusions for today. Obviously this is hard to avoid when conducting a study attempting to correlate college with future earnings, but it’s still noteworthy. Unless employers are now paying triple what they used to pay in 1980, the price of college has risen steeply relative to everything else.

5. This study, along with similar studies, all suffer from selection bias. As going to college is the absolute norm in today’s society, essentially every student above-average in intelligence and work ethic attends college. It shouldn’t be a surprise, therefore, when these same people who already possessed favorable skills outperform their peers who arguably didn’t have those skills.

Further, kids who attend college are generally in a better socioeconomic position than those who don’t. They also, on average, have parents who attended college, live in wealthier neighborhoods, and were generally raised in more favorable circumstances. It may not be fair, but those who grow up underprivileged live different lives than their peers with better upbringings.

What these studies are essentially doing is comparing the lifetime earnings of two groups of people: one group who self-selects into going to college, and the other who self-selects not to.

Even if we do take this study at face value, the conclusion is that the average college grad will only begin to recoup their investment after 20 years. Then, in another 20 years, by retirement age at 65, the average college grad will have finally earned $800,000 more than his non-college-educated peer. I don’t know about you, but waiting 20 years for an investment to break even and another 20 years to recoup $800,000 seems like a poor investment to me.

As James Altucher has mentioned before, the only true way to prove that going to college is beneficial is the following method: grab 2,000 kids accepted into Harvard and divide them into two groups – one that attends Harvard, and the other barred from attending college of any sort. Then compare their earnings and achievements thirty years later.

The argument is that the latter group of kids will find other, more creative and entrepreneurial endeavors to spend their time on. They will forgo the six-figure cost, along with the opportunity cost of spending four to six years in school, and instead build real-world skills such as sales and marketing. They can self-educate, using the myriad of resources available today. They can travel, gleaming insight that only travel can bring. They can learn to fail, outside of the bubble of confined education. They can spend the prime years of their life actually creating things of value.

Such a study is unlikely to ever happen, of course, but it would be the only way to control for any biases or external influences.

So what’s the point to all this? Well, I’m not going so far as to say all college is useless and nobody should go. I do think there is merit, and as with anything in life, the best answer is always it depends.

Rather, I am saying that studies and statistics have to be questioned. Who is perpetuating the notion that we have to go to college, and why should I listen? Statistics are meant to add clarity to issues, but more often than not, it seems they create confusion and are used to manipulate emotions or actions. We’ve all been fed this one about college from a young age by parents and society alike, so it can be difficult to properly analyze where this belief came from. Surely, murky statistics like ‘college grads earn more’ helped drill it into us.

The notion that college is the catalyst for a lifetime of happiness or vastly greater earning potential has led a generation of people down a dark road clamoured with debt and unhappiness. It’s true that many jobs today require a college diploma, but things are slowly beginning to change. Google has begun hiring employees without college degrees, as have many startups. There is a wealth of learning resources online, and the self-education movement is growing. Things will likely be even more optimistic in the future, as the younger generation grows up and implements more lenient and efficient hiring methodologies.

It’s a complex issue, but it’s one that will need a resolution sooner rather than later.

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