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The “higher education bubble” in the USA: could going to university become a bad investment?

Tertiary education is widely believed to be a very good private investment, even in countries like the USA, where the tuition fees are very high.

However, some authors suggested that higher education could behave like a bubble in the USA: tuition fees are constantly rising and so is the amount of student loans, and the return on higher education could become very bad if college students don’t find a well-paid job after their studies.

From an economic point of view, to know if there is an education bubble in the USA, we need to compare the return on higher education (which can be expressed as a net present value) and the cost of it for the individual, i.e. the tuition fees.

The fact that tuition fees have constantly increased in the USA in the last 20 years can be partly explained by political changes: the education system has been liberalized and a share of the cost of higher education has been transferred from government to the students.

Still, the private returns on education also kept increasing, but with a slower pace. Economic studies show that on average, the expected return is still largely positive, even if the high level of student loans are postponing the moment when the return becomes positive. Indeed, a study from 2005 showed that the average time to cover the cost of tuition fees was 10 years, but the final net present value was 300 000 dollars in average (Lammela 2007).

In addition, if we take into account the total individual cost of tertiary education – including social contribution, income tax effect and foregone earnings – the OECD data(OECD 2012) suggests us that the USA has an excellent net present value of private education.

Indeed, it is the country with the highest private cost but also the highest private return and the net return (above 300 000dollars) is the second highest among the OECD countries. As compared to countries like Denmark or Sweden, which are more equalitarian and have redistributive tax systems, higher education is a much better private investment.

Therefore, the empirical data suggests that the concept of an “education bubble” is poor.

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However, the increasing level of student loans’ defaults(Diverse education 2013) also suggests that this average hide very different situations, according to the level of the university and the major chosen. For some majors, for example human sciences like psychology and sociology, the net present value, when calculated, is actually very low (Lammela 2007).

The bubble effect might also be explained by the growing inequalities between universities in terms of level and return on education. Unlike many countries, not only the best universities are expensive in the USA, and some authors suggest a strong asymmetry of information between the universities and their students on the correlation between tuition fees and the level and return on investment provided by the university.

We could also add that in a society where a large part of the population has a college degree, the signaling role of tertiary education might decrease and the effect of tertiary education on productivity becomes crucial.

To conclude, this analysis suggests that quality of tertiary education plays a very large part in explaining the return on investment of going to college and paying tuition fees.

Elise Saunier

#1493

References:

          Lammela Jason, 2007, Net present value of a higher education: a study of majors across different universities, Duquesne University, Pennsylvania

          Abdul-Alim Jamaal, 2013, Experts find increased default rate on student loans troubling, Diverseeducation.com

          OECD 2012, Education indicators in focus: What are the returns on higher education for individuals and countries?

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Author: studentnovasbe

Master student in Nova Sbe

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