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W ill there ever be a timewhen a college educationjust isnt worth the cost? Risingtuition and increasing studentdebt, matched with compara-tively stagnant income growth,has caused people to questionthe possibility.

Put differently, the basic ques-tion posed above is: at whatpoint does the increasing costof tuition outweigh the ben-et of a degree in terms ofhigher earnings? For simplicity,

say you would earn $40,000per year for the next 30 yearswithout a college degree, or$60,000 per year for the next30 years with a college degree.Setting aside the fact that adollar today is worth more thana dollar tomorrow (the timevalue of money), the total sumof earnings without a degreewould be $1.2 million. The totalsum of earnings with a degreewould be higher, totaling $1.8million. Thus the premium fora college degree in this exam-ple would be the differencebetween the two, or $600,000.So in our example case, if youcould obtain a college degreefor $400,000, you would stillbe better off by $200,000 overyour lifetime.

A sticker price of $400,000 forcollege is far above anythingpeople pay today, but thissimple example illustrates thestrong economic benets ofobtaining a degree and whysustained demand has beenable to drive up tuition. Thereare a host of considerations tothink about when exploring thisproblem, including studentsability to borrow against futurewages, the signal a degreegives to employers about appli-cants, the intrinsic value of an

education in terms of increasedproductivity, and the attractive-ness of plausible alternatives.

We found that a four-year col-lege degree will no longer beworth its cost in the year 2086,when tuition would total ap-proximately $725,000 in todaysdollars, or the bargain price of$181,000 per year. This is basedon the current lifetime earningspremium as estimated by theCensus and adjusted for the netpresent value. It also assumesthe status quo is maintained inhigher education, which seemsunlikely given the lengthy timehorizon between now and 2086and the wide array of alterna-tives to a traditional collegedegree already available in theeducation sector.

When the cost o college stops going up

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Matt McDonaldPat BradyAlex Dilley

Findings:

A our-year collegedegree will no longerbe worth its cost inthe year 2086 at aprice o $181,000 peryear

Today, a college de-gree remains one othe best investmentsthere is

Innovations in the ed-ucational sector arelikely to continue andto urther disrupt thestatus quo

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Methodology

We approached solving thisquestion in three steps. First,we evaluated the present eco-nomic benet(the premium) ofa college educa-tion. Second, byusing historicaltuition data, wewere able tocalculate an ap-proximate aver-age growth ratefor college costs.Third, by lookingfor the point inthe future wherebenets exceed costs, we were

able to answer the question:will there be a time when acollege education is not worththe cost?

We calculated the benet of afour-year degree by compar-ing the net present value (NPV)of work-life earnings data ofcollege graduates with the NPVof work-life earnings of highschool graduates, using Censusdata. To calculate the NPV ofwork-life earnings, the annualexpected earnings were dis-counted at a rate equal to thecurrent 10-year Treasury yield,2.94%. This rate was chosen asit is the basis for determiningthe Stafford student loan rateand it also represents a risk freerate commonly used in dis-counting.

To examine the cost side, weprojected future increases intuition costs based on historicgrowth rates. Using NationalCenter For Education Statistics(NCES) data collected over thepast 40 years measuring av-erage tuition, fees, room, andboard in 2011 dollars, we cal-culated the compound annual

growth rate (CAGR) over thepast 10 years. This growth ratewas then applied to currentcosts to project tuition costincreases into the future.

After establish-ing the benetand the cost, wethen mappedthe intersectionof marginal costand marginalbenet to de-termine when afour-year degreeno longer makessense as an in-vestment.

Findings

Using this approach, we foundthat the present benet of acollege degree over a highschool diploma was equal toapproximately $725,000 in2011. This marginal benetwas calculated by comparingthe NPV of lifetime earningsof high school graduates and

college graduates. We appliedthis same method and foundthat the premium of earning abachelors degree over an as-sociates degree amounted toapproximately $340,000 in 2011.We assume that these premi-ums do not shift over time,though this may change in thefuture.

Using historical NCES collegetuition data, the 10-year CAGRfor tuition cost increases wasfound to be equal to 2.85%. ThisCAGR was applied to the 2010-2011 average annual tuition costof approximately $23,000, andprojected annually until 2100.We were able to determine

the cost-benet intersectionpoint by modeling these pro-jections against the previouslycalculated earnings benet ofattending a college over onlyreceiving a high school diploma(approximately $725,000).

This intersection would occurin 2086 (see Figure 1), whenattending college would no

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The considerable

time between nowand when a collegedegree is no longerpro itable speaks tohow valuable highereducation is in to-days economy.

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longer be a worthwhile invest-ment. The same model project-ed it would be more attractiveto get an associates degree,rather than a bachelors degree,in 2065. The considerable timebetween now and when a col-lege degree is no longer prof-itable speaks to how valuablehigher education is in todayseconomy. College remains oneof the best investments thereis.

The Sheepskin Effect

Education itself cannot entirelyaccount for the higher earningspotential of college graduates.Beyond the skills a student

learns while attending college,other factors help reinforcethe higher earnings potential acollege graduate receives. TheSheepskin Effect, also known asthe signaling effect, accountsfor the marginal benet re-ceived by a college graduateover an equally capable can-didate who does not hold adegree.

Without the helpof signals, em-ployers wouldhave a difficulttime recruitingand hiring thecandidates theyare seeking. Qualities employ-ers look for include intelligence,productivity, and motivation.For college graduates, a degree

can serve as a signal to em-ployers that they possess thesedesired qualications.

Although the impact of theSheepskin Effect can accountfor a signicant portion of acollege graduates marginalbenet, it is difficult to calcu-late the exact degree to whichsignaling affects a graduates

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lifetime earnings. A variety ofstudies measure the effect ofsignaling on educational re-turns, using similar approaches;however, results vary signi-cantly. Of the studies exam-ined, including studies by David

Jaeger andMarianne Page,

Jim Kjelland, andJames Albrecht,ndings estimat-ed that signal-ing accountedfor between 10and 50 percentof the benet

gained through higher educa-tion. By applying the median ofthese estimates to our projec-tions, one could assume thatapproximately 30 percent ofthe lifetime earnings of a col-lege graduate can be attributedto signaling (see Figure 2).

Implications

If youre looking for tuitioncosts to moderate in the nearfuture, dont hold your breath.There is still plenty of room for

costs to rise, and considerablevalue to getting a degree. Ofcourse, assuming that studentsshould willingly pay tuitioncosts of $725,000 is an unrealis-tic conclusion. But the dynam-ics outlined in this paper dohelp explain why there is suchhigh demand from students,

and a surge of lower cost alter-natives and innovations to a4-year degree; such as onlineeducation, for-prot education,skills testing, school ratings sys-tems, start-ups, and others.

It is the economic returns tocollege that is driving tuitionhigher, and this will continue.Those who are hoping for mod-eration in cost would do well toencourage further addition ofalternatives to the traditional4-year degree. In the end, it isinnovation in educational deliv-ery that has the highest poten-tial to impact cost. [ ]

In the end, it is inno-vation in educationaldelivery that has thehighest potential toimpact cost.