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.