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Economic Impact of Higher Education – Understanding the Value of Higher Education
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Economic Impact of Higher Education – Understanding the
Value of Higher Education
November 13-15, 2005
copies of this presentation can be found atwww.business.duq.edu/faculty/davies
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College Tuition (4-Year Private, $ per year)
$-
$5,000
$10,000
$15,000
$20,000
$25,000
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
College Tuition Consumer Prices
Growth in Tuition Over Time
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
College tuition has increased 7% annually while consumer inflation has averaged only 4.5% annually.
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College Tuition as % of Median Household Income (4-Year Private)
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Cost of Education Relative to Household Income
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
College tuition has grown from 20% of household income in 1976 to over 45% in 2003.
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Sources of Benefits to Higher Education
Benefits of a college education vs. a high school education
1. Difference in entry-level wages.
2. Difference in the growth rates of wages over the course of a career.
3. Difference in the likelihoods of employment.
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Difference in Entry-Level Wages
Source: Statistical Abstract of the United States, 2004-2005
Starting salaries 42% higher for degreed workers
Average Earnings for 18-24 Year Olds (2002)
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
High School Diploma College Degree
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Difference in Growth Rate of Wages
Source: Statistical Abstract of the United States, 2004-2005
Salaries grow 1.1%-points faster for degreed workers
Average Annual Real Growth in Wages from Age 24 to Age 60
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
High School Diploma College Degree
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Difference in Likelihoods of Employment
Source: Statistical Abstract of the United States, 2004-2005
Likelihood of employment 15%-points greater for degreed workers
Likelihood of Employment (% of civilian, non-institutionalized population)
0%
10%
20%
30%
40%
50%
60%
70%
80%
High School Diploma College Degree
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Average Annual Earnings (2002)
EducationAverage Earnings
Probability of Employment
Expected Earnings
High School Diploma $37,680 60.3% $22,718College Degree $80,144 75.8% $60,730
Expected Earnings
(Earnings) (Probability of Employment) = Expected Earnings
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Expected Earnings
Annual Earnings (18-65 year olds)
The average working college graduate earns 113% more than the average working high school graduate.
Expected Annual Earnings (18-65 year olds)
The average college graduate earns 167% more than the average high school graduate.
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Compensation-Expense Comparison
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
Cumulative Expected Compensation less Tuition
-$80,000
-$60,000
-$40,000
-$20,000
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
18 19 20 21
Age
High School Graduate (2002) College Student (2002)
$184,000 difference by age 21
High school graduate enters workforce at age 18 and begins to accumulate earnings.
College student starts college education at age 18 and begins to accumulate debt.
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Compensation-Expense Comparison
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
Cumulative Expected Compensation less Tuition
-$80,000
-$60,000
-$40,000
-$20,000
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
18 19 20 21
AgeHigh School Graduate (2002) College Student (2002)
High School Graduate (1977) College Student (1977)
In 1977, difference was $45,000
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Cumulative Expected Compensation less Tuition
-$500,000
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
$4,500,000
18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64
Age
High School Graduate (1977) College Student (1977)
Compensation-Expense Comparison
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
Cumulative expected difference was $375,000 in
1977
Breakeven at age 28
After finishing college, the college student’s earnings begin to outpace the high school graduate’s earnings.
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Compensation-Expense Comparison
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
Cumulative Expected Compensation less Tuition
-$500,000
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
$4,500,000
18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64
Age
High School Graduate (2002) College Student (2002)
Cumulative expected difference is $2.3 million in
2005
Breakeven at age 25
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Evaluating the Benefit of Higher Education
Three ways to evaluate the benefit of an investment
1. Breakeven Point
2. Internal Rate of Return
3. Net Present Value
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Evaluating the Benefit of a College Education
Breakeven PointHow many years will it take to recoup investment?
ExampleInvest $10,000 and receive $1,000 each year for 20 years.Breakeven = 10 years
1977Cost of college plus lost compensation $63,000 (in 1977$)Benefit of college $375,000 (in 1977$)Breakeven: 11.4 years
2002Cost of college plus lost compensation $184,000 (in 2002$)Benefit of college $2.3 million (in 2002$)Breakeven: 9.1 years
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Evaluating the Benefit of a College Education
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
Breakeven on Investment in College Education
8
9
10
11
12
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Breakeven (years from first year of college)
The breakeven period on a college education has fallen from 11 years in 1977 to 9 years today.
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Evaluating the Benefit of a College Education
Internal Rate of ReturnThe benefit represents what rate of return on the investment?
ExampleInvest $10,000 and receive $10,800 back one year in the future.IRR = 8%1977Cost of college plus lost compensation $63,000 (in 1977$)Benefit of college $375,000 (in 1977$)Real IRR (rate of return after inflation): 13.9%
2002Cost of college plus lost compensation $184,000 (in 2002$)Benefit of college $2.3 million (in 2002$)Real IRR (rate of return after inflation): 17.2%
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Real Internal Rate of Return on Tuition
13%
14%
15%
16%
17%
18%
19%1
97
7
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
Evaluating the Benefit of a College Education
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
The real rate of return on a college education has risen from less than 14% in 1977 to over 17% today.
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Evaluating the Benefit of a College Education
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
Average Rates of Return (1977 through 2002)
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%6
Mon
thC
Ds
20-Y
ear
Trea
sury
Bill
s
AA
A B
onds
BA
A B
onds
S&
P 5
00
DJI
A
NA
SD
AQ
Col
lege
Edu
catio
n
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Evaluating the Benefit of a College Education
Net Present ValueThe net future benefit is equivalent to what lump-sum amount today?
ExampleGiving up $10,000 today and receiving $1,000 each year for 20 years is the same as receiving $2,462 today (assuming 5% market interest).1977Cost of college plus lost compensation $63,000 (in 1977$)Benefit of college $370,000 (in 1977$)Net Present Value: $163,000 (in 1977$)
$524,000 (in 2005$)2005Cost of college plus lost compensation $220,000 (in 2005$)Benefit of college $2.4 million (in 2005$)Net Present Value: $1,035,000 (in 2005$)
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Evaluating the Benefit of a College Education
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
Net Present Value (2003$)
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,00019
77
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
The present value of a college education net of tuition has doubled over the past 25 years.
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These Estimates are Conservative
Reality: More than 70% of students pay less than $10,000 per year, and 50% of students pay less than $6,000 per year.
Assumed:No financial aid.Reality: Grant aid averaged $3,600 per student in
2002.
Assumed:No tuition discounting.Reality: Average 4-Year private institution
discounted 39% in 2002.
Assumed:Tuition is $19,700 per year (average for 4-year private institutions in 2002).
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Implications of Tuition as an Expense vs. Investment
Comparing tuition to household income reduce the cost of loans regardless of the future income generated by the loans.
Reduction in liquidity prevents students from leveraging future income gains students forced to find current income sources to fund educations.
Misperception of tuition as an expense, rather than investment, is reinforced.
Reducing loan interest rates causes a reduction in liquidity.
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4%
6%
8%
10%
12%
14%
16%
18%
2% 3% 4% 5% 6% 7% 8% 9% 10% 11%
Loan Interest Rate
Lo
an P
aym
ent
as %
of
Gro
ss I
nco
me
20-Year Loan (wage tax exempt)
Perceived Burden of Tuition Debt
50% of graduates report at least a “moderate” debt burden when their loan payments rise above 8% of their gross incomes.
Low
Pain
Mod
era
te
20% of graduates report at least a “high” debt burden when their loan payments rise above 12% of their gross incomes.
Hig
h P
ain
Source: College on Credit: How Borrowers Perceive their Education Debt, Nellie Mae Corporation, 2003.
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100% of Tuition & Related Fees Financed via Debt
4%
6%
8%
10%
12%
14%
16%
18%
2% 3% 4% 5% 6% 7% 8% 9% 10% 11%
Loan Interest Rate
Lo
an P
aym
ent
as %
of
Gro
ss I
nco
me
10-Year Loan 20-Year Loan
Low
Pain
Mod
era
te
Hig
h P
ain
If loan terms were extended to 20 years, banks could charge almost 6% interest on student loans before students started to feel “moderate” pain from student loan debt.
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100% of Tuition & Related Fees Financed via Debt
4%
6%
8%
10%
12%
14%
16%
18%
2% 3% 4% 5% 6% 7% 8% 9% 10% 11%
Loan Interest Rate
Lo
an P
aym
ent
as %
of
Gro
ss I
nco
me
10-Year Loan 10-Year Loan (wage tax exempt)
Low
Pain
Mod
era
te
Hig
h P
ain
If loan terms remained at 10 years, but loan payments were made in pre-tax dollars, banks could charge over 8% interest on student loans before students started to feel “high” pain from student loan debt.
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100% of Tuition & Related Fees Financed via Debt
4%
6%
8%
10%
12%
14%
16%
18%
2% 3% 4% 5% 6% 7% 8% 9% 10% 11%
Loan Interest Rate
Lo
an P
aym
ent
as %
of
Gro
ss I
nco
me
10-Year Loan 20-Year Loan (wage tax exempt)
Low
Pain
Mod
era
te
Hig
h P
ain If loan terms were extended to 20 years and loan payments
were made in pre-tax dollars, banks could charge more than 9% interest on student loans before students started to feel “moderate” pain from student loan debt.
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Thoughts Outside the Box
Conclusion:
Reducing loan interest rates solves a problem that doesn’t exist, and may introduce a problem that wouldn’t have existed otherwise.
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Thoughts Outside the Box
Government can encourage markets to provide more liquidity
Allow market rates to prevail e.g. 12% interest rate on college loans
Employers deduct student loan payments from paychecks
No additional cost: use existing withholding infrastructure
Reduces loan default costs
Loan payments capped at 15% (?) of gross income
Life of loan can vary so that loan is paid in full given cap
Automatically provides relief during unemployment
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Thoughts Outside the Box
Government can encourage markets to provide more liquidity
Tuition loan payments in pre-tax dollars
Current tax treatment reinforces “tuition as expense”
Possibly revenue neutral; maybe revenue positive
No government cost of loan guarantees
No government cost of interest rate subsidies
No government cost of grants
College graduates generate $700,000 more in wage taxes net of increased Social Security retirement benefits than high school graduates
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Expected Wage Tax Revenue
A college graduate generates $740,000 more in wage tax receipts (2003$) than a high school graduate.
Wage Tax Revenue Generated by a Student Over Course of Life (2003$)
StudentFederal
Income TaxState Income
TaxFICA Tax
(both halves)Total Tax Receipts
High School Graduate $159,000 $41,000 $217,000 $417,000College Graduate $605,000 $94,000 $458,000 $1,157,000Difference $446,000 $53,000 $241,000 $740,000
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Expected Wage Tax Revenue
A college graduate generates $700,000 more in net wage tax receipts (2003$) than a high school graduate, after accounting for increased Social Security benefits.
Net Wage Tax Revenue Generated by a Student Over Life (2003$)
StudentTotal Tax Receipts
SS Retirement Benefits
Tax Receipts Less SS Benefits
High School Graduate $417,000 ($90,000) $327,000College Graduate $1,157,000 ($132,000) $1,025,000Difference $740,000 ($42,000) $698,000
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Interesting Market EvolutionStudents charged different rates on the basis of secondary school performance, university performance, selected major, and demonstrated ability.
Students pursuing degrees that lead to better paying jobs will be charged lower interest rates
Incentive to students to pursue more valuable careers impacts at time of enrollment rather than post-graduation (when it is too late to affect behavior)
Interest rates become a market metric of the quality of secondary-school preparation and university education
Incentive to universities to make educations relevant impacts at time of enrollment rather than generations later
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Education as an Export
Higher education is a significant U.S. export
US exports of higher education increased from $3.5 billion in 1986 to $12.8 billion in 2002.
Annual growth rate of 8.4%.
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U.S. Net Exports as a Fraction of Total Net Exports
-60.0%
-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%R
oyal
ties
&Li
cens
e F
ees
Bus
ines
s,P
rofe
ssio
nal,
and
Tech
nica
l
Fin
anci
al S
ervi
ces
Edu
catio
n
Trav
el
Cap
ital G
oods
(non
-aut
omot
ive)
Tele
com
mun
icat
ion
Ser
vice
s
Foo
ds, F
eeds
, and
Bev
erag
es
Insu
ranc
eS
ervi
ces
Indu
stria
l Sup
plie
san
d M
ater
ials
Aut
omot
ive
Veh
icle
s, E
ngin
es,
and
Par
ts
Con
sum
er G
oods
(non
-foo
d, n
on-
auto
mot
ive)
Negative values indicate net imports
Education as an Export
Source: International Trade Association, 2003, National Center for Policy Analysis, 2001, Bureau of Economic Analysis, 2003.
Foreign students studying in the U.S. contributed $13 billion to the U.S. economy in 2002. Education is the fourth largest source of net exports in the U.S.
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36
Annual Growth in U.S. Net Exports
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%Te
leco
mm
unic
atio
nS
ervi
ces
Fin
anci
al S
ervi
ces
Bus
ines
s,P
rofe
ssio
nal,
and
Tech
nica
l
Trav
el
Roy
altie
s &
Lice
nse
Fee
s
Edu
catio
n
Foo
ds, F
eeds
, and
Bev
erag
es
Cap
ital G
oods
(non
-aut
omot
ive)
Aut
omot
ive
Veh
icle
s, E
ngin
es,
and
Par
ts
Indu
stria
l Sup
plie
san
d M
ater
ials
Con
sum
er G
oods
(non
-foo
d, n
on-
auto
mot
ive)
Insu
ranc
eS
ervi
ces
Negative values indicate net imports
Education as an Export
Source: International Trade Association, 2003, National Center for Policy Analysis, 2001, Bureau of Economic Analysis, 2003.
Education is one of only six categories that has exhibited net export growth over the past fifteen years.
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Some Pending Legislation
Pending legislation falls (roughly) into three groups:
1. Legislation to control tuition or tuition growth.
2. Legislation to provide tuition tax incentives.
3. Legislation to provide tuition loan forgiveness.
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Unintended Consequences of Price/Growth Controls
Colleges quote a “sticker price” and then discount from that price on the basis of student need and academic strength.
Colleges use tuition discounting to transfer tuition costs from less needy to more needy students.
Unintended consequence: Price/growth controls will prevent the transfer of tuition costs from less needy to more needy students.
Unintended consequence: Price/growth controls will result in fewer needy students attending college.
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Unintended Consequences of Price/Growth Controls
Dollars foreign students spend in the U.S. on education and living are part of U.S. exports.
Unintended consequence: Price/growth controls will slow U.S. education exports resulting in a worsening of the trade deficit.
Unintended consequence: Price/growth controls will prevent the transfer of tuition costs from American to foreign students (via tuition discounting), benefiting foreign students at the expense of American students.
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Unintended Consequences of Tax Incentives
Needy students’ families pay relatively little income tax.
Wealthy students’ families pay no Social Security tax (at the margin).
Unintended Consequence: Making tuition payments free of Federal/State taxes, but not Social Security tax, benefits families of wealthy students and has little effect on families of needy students.
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Unintended Consequences of Loan Forgiveness
Proposed legislation allows loan forgiveness for students entering select career fields: public service, teaching, early childhood education, nursing, child welfare, nutrition.
Unintended Consequence: Encourages more students to enter these select fields. Wages in those fields will decline.
Unintended Consequence: As wages decline in the select fields, the most talented workers will leave for less crowded fields resulting in a decline in the average quality of workers in the select fields.
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Economic Impact of Higher Education – Understanding the
Value of Higher Education
November 13-15, 2005
copies of this presentation can be found atwww.business.duq.edu/faculty/davies