Valuing College on a Risk-Reward Basis


college_risk_reward_shutterstock_032315Another study, “US university degrees: High cost, high reward,” shows that completing college is a good financial deal. But this one is a bit different in that it looks at the return of investment on a risk-reward basis. As researchers Jeffrey Brown, Chichun Fang, and Francisco Gomes explain, “College-educated workers are less likely to experience unemployment than workers without a high school diploma, but they also face much higher uncertainty in their career paths and lifetime earnings.”

And remember, this all assumes humans are risk averse. Investors, for instance, would rather have a low-risk portfolio than an high one if investment returns are equal otherwise.

From the study:

Calculating the risk-adjusted value of college education naturally requires assumptions about individual risk preferences, and thus we report a range of valuations that depend on risk aversion. We estimate the risk-adjusted value of college education to be between $225,000 (for very risk-averse people) and almost $600,000 (for less risk-averse people). These correspond to increases in total present-value lifetime wealth of 35% to 48%, even after adjusting for risk. …

It is nevertheless important to point out that even in the most conservative estimates the value of college education is still positive even after we account for the (direct and indirect) cost.  The rate of return to attend a public (private) college is 76% to 353% (74% to 180%), depending on individual risk preference. Hence, the value of college education is still quite large and our results suggest that college education still a worthy investment.

And again, completing college is a lot different than merely attending college. AEI’s Andrew Kelly:

For me, a more effective message would be to tell a prospective student that yes, completing college is, on average, worth the time and money. But not all postsecondary options are created equal, so choose the one that reflects your talents and abilities and gives you the best chance of success. And if you choose to go, work your tail off to make sure you finish.

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  1. Ricochet Inactive

    All excellent advice. We all must eventually pay own bills, and education can be the biggest. But, I suggest high schoolers also keep their eyes on the prize: knowledge and virtue. The interval between high school and career and family are the only years where we have the time to study the big questions- how the world around us works, what we believe, and what we value. If our childhood comprises our formative years, these are our self-formative years, and, therefore, even more important.

    Given that the conservative press routinely reminds us that universities are dominated by liberals, a modern American university is an ironically difficult place to pursue a liberal education. A combination of excessive government subsidies and regulation (and a creepy new form of indentured servitude called student loans) have enabled a seemingly insular, privileged class to emerge and snatch control of the university from students and faculty. This new class is apparently dominated by one political party (Democrat), one political philosophy (democratic socialist) and one world-view (secular humanism) and sometimes excludes, denigrates or suppresses other viewpoints. Students have fewer opportunities to shape their own curriculum. Bizarre limits on free speech are regularly attempted. University administrators receive plush compensation packages. Exploitation of students, suppression of free inquiry, and the comfort of bureaucrats are not exactly the ideals on which universities were founded.

    While this may be one of the most challenging times to start higher education, it may be one of the most exciting. Knowledge circulates almost for free at the speed of light. My advice is to keep your eyes on the prize, stay out of debt, be flexible, and take responsibility for the content of your own education.

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  2. TKC1101 Inactive


    While this may be one of the most challenging times to start higher education, it may be one of the most exciting. Knowledge circulates almost for free at the speed of light. My advice is to keep your eyes on the prize, stay out of debt, be flexible, and take responsibility for the content of your own education.

    Wonderfully sound advice. I do tend to think that the self -formative phase has been forcibly hooked to traditional college but that has become less effective. My experience has taught me that self formative education about the world comes from a psychic shock, a change in surroundings, a major loss or shift in your life. Going to college used to be that, but it can also be triggered by the loss of a parent, the first time you come under fire, your first child, your first paycheck, the first sale of a painting or many other events.

    In fact, the PC environment is   actively shielding students from anything that might jar their little heads out of childhood.

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  3. Ricochet Inactive

    Hmm…these guys are way smarter than me so may be wading into dangerous territory but….

    I’m always curious what FV compounding rate [or discount rate if you prefer] is applied to the assumed tuition spending and all ancillary expenses?

    IOW, using the authors’ same assumptions for “Risk appetite,” at what rate does the non-college attendee’s $23-46k/yr in tuition [plus ancillary expenses] capital deployed [4-8 years earlier than non-college attendees?] compound and how is it calculated in the final $225-600k delta?

    Assume you borrow $138k [the median tuition based on their figures] day one and interest free for 4 years and assume the ancillary room, board, etc is all a wash.  The $138k is immediately invested in a tax-deferred investment account with the same risk/return assumptions they apply and you go to work 4 years earlier, even at nominal earning power rates, paying off the debt.  How does the direct and indirect cost of college get so grossly eclipsed by miraculous future earning power ON AVERAGE [please note: I’m not suggesting Anesthesiologists don’t, on average, earn more money over their life vs. Psychology majors now slinging coffee at Starbucks] when the capital investment is identical and begins being reduced 4 years earlier in the Work vs. College scenario.

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