There are obvious advantages to going to college. And yes, science majors have much higher lifetime earnings than art majors. But the reasons why aren't as simple as some studies would have you believe.
Whether to attend college and, if so, what to study are decisions of great financial and personal importance for younger Americans. It has become conventional wisdom that as many people as possible should graduate college and that college students should increasingly major in technical fields such as engineering, math and computer science. But college is a major investment. Average annual tuition at public four-year colleges today tops $13,000, with tuition at private schools exceeding $31,000. Moreover, the college major chosen by students guides the types of jobs they may hold for the rest of their lives, which influences not only income but also personal satisfaction from work. These choices should not be entered into lightly or lacking solid information.
Unfortunately, popular research on the costs and benefits of higher education is plagued by basic statistical errors, generating misleading conclusions and encouraging bad public policy. It is a basic tenet of statistics that correlation does not imply causation: simply because two things tend to occur together -- such as college attendance and higher incomes -- does not necessarily mean that one causes the other. While both college attendance and choice of major do affect earnings, their effects are much smaller than has been reported.
In a recent study, Michael Greenstone and Adam Looney of the Hamilton Project conducted a seemingly simple cost-benefit analysis: While four years of college today can cost in excess of $100,000, a typical college graduate earns roughly $13,000 more per year than a high school graduate. They conclude that, despite rising tuition costs, the annual "return" to college education tops 16 percent, far exceeding investments such as stocks or bonds.
Since college loans carry interest rates well below 16 percent, their result implies that attending college -- even if you must borrow tens of thousands of dollars to do so -- will prove to be a very good financial choice. There are policy implications as well. The authors state that "Ensuring that all students have access to this investment requires both a commitment to making it financially feasible at all income levels..." But federal aid such as Pell Grants, work-study programs and tuition tax credits have more than tripled over the last decade, reaching $65 billion in 2011. Washington also made over $100 billion in subsidized student loans last year. The implication is that even more college aid is needed.
There are two problems with this analysis. First, it conflates going to college with graduating from college. They're definitely not the same. Data from the National Center for Education Statistics show that only 58 percent of new college students who began in 2004 had graduated six years later. Dropout rates are even higher at less selective colleges, whose students are presumably most on the margin between attending college following high school and entering the workforce. Dropouts can end up holding the bag for thousands in college debt, but earn significantly less on average than college graduates. Calculating returns to education only for those who attend college and graduate is like measuring stock returns for Google while ignoring those for General Motors. University of Rochester economist Gonzalo Castex has found that dropout risk accounts for a significant portion of the seemingly high returns to college education.
Greenstone and Looney also assumes that high school graduates who attend college are the same as those who don't, meaning that college education is the only thing driving earnings differences later in life. This is far from true. High school students who go on to college took a more rigorous high school curriculum, scored better on tests of reading and math, came from higher-income families, were in better physical and mental health, and were less likely to have been arrested. These are all correlated with higher earnings regardless of whether a person attends college, either because they contribute directly to higher pay or because they proxy for other factors that do. How much a college education increases the incomes of those who attend is a different question than the simple difference in earnings between college grads and individuals with only a high school diploma.
Using the 1997 National Longitudinal Survey of Youth it is possible to control for these and other differences between college grads and the rest of us. Once you control for both the risk of not graduating from college and differing personal characteristics, the earnings boost attributable to college attendance is cut in half. Looking at data that includes people from a wider age range confirms these results. Treating the entire wage gap between high school and college graduates as if it's due to going to college significantly overstates the financial benefits of attending college.
THE MAJOR QUESTION
A similar logical flaw affects widely-publicized studies on the "best" college majors, interpreted as those leading to higher pay following graduation. For instance, a report from the Center on Education and the Workforce at Georgetown University details the "economic value" of different college majors. Relying on data from the Census Bureau's American Community Survey, studies such as this purport to show that technical fields of study lead to much higher earnings after graduation, while "softer majors" pay far less. For instance, median earnings for individuals with a Bachelor's degree in engineering, mathematics or computer science top $70,000, while BA holders who majored in the arts, education or social work earn less than $47,000. Unemployment rates also differ by college major, with the Georgetown group arguing that "choice of major determines unemployment."
Once again, this study claims that education determines differences in pay and employment that may actually arise from other causes. For instance, high school graduates aiming for high-earning majors such as engineering enter college with higher average SAT scores, according to the National Center for Education Statistics, while those aiming for lower-paying majors have lower average SAT scores. But SAT scores almost certainly are correlated with higher incomes regardless of college major chosen. Similarly, high-paying jobs also entail longer work hours. Numerous studies, including by Daniel Hamermesh and Steven Gould of the University of Texas and by Joseph Altonji, Erica Blom and Costas Meghir of Yale, have found that controlling for SAT scores, hours worked and other factors explains most of the pay differences that initially appear to be driven by choice of college major.
In addition, while skill-specific technical fields may have higher average earnings they also exhibit greater variations in earnings. For instance, an engineer can earn very high wages if his skills are in demand, but changes in technologies or markets can render his skills less valuable and retraining in a different specialty can take time. On the other hand, majors imparting more general skills have both lower average earnings and less earnings risk. A history major may not earn much, but he has a wide variety of professions to choose from. In part at least, following one of the "better" college majors may not be like winning the sweepstakes so much as purchasing a stock: higher returns, but more risk.
REAL TALK ABOUT COLLEGE'S ADVANTAGES
None of this is to say that attending college isn't worthwhile or that students shouldn't consider the more technical majors in deciding where to specialize. Moreover, a college education comes with many benefits beyond a higher income. But to say that "college isn't for everyone" isn't to be patronizing. It's simply to say that the income gains attributable to holding a college degree aren't as large as is claimed, and some people could come out ahead financially by not attending college.
Any investment is about value added -- what you get relative to what you started with. Popular studies regarding whether to attend college and what field to study ignore the skills and abilities different students start with, as well as their different preferences regarding job stability and the types of hours they'd like to work.