Research

Even with Rising Costs, College Remains a Solid Investment

• By Dian Schaffhauser
• 08/08/19

In a study by the Federal Reserve Bank of New York, two researchers have determined that even though college costs are rising, it's still a good investment.

In an update to a study done in 2014, Jaison Abel and Richard Deitz found that while the average rate of return for a bachelor's degree has declined slightly in recent years due to rising costs, it still remains high at around 14 percent, which, the researchers wrote, "easily" surpasses "the threshold for a good investment."

According to data pulled from several sources, the average bachelor's graduate earned about $78,000, compared to $45,000 for the average worker with a high school diploma. That's a premium of almost 75 percent. Even as a strong labor market has helped boost the earnings of high school grads, it has accelerated the earning power of college graduates more, keeping the "college wage premium near an all-time high," the researchers noted. This wage premium continues paying out over the typical 40-year working life.

"Back-of-the-envelope" calculations have suggested that the internal rate of return for the bachelor's degree has settled at just under 14 percent, down a couple of points from the last few years. The return would be higher, the researchers wrote, if tuition and "opportunity costs" weren't both on the rise.

According to the report, 14 percent "easily exceeds" the long-term rates of return on other kinds of investments, including stocks (estimated at 7 percent) and bonds (3 percent).

However, the researchers emphasized, there are a few caveats. A big one is this: Taking more than four years to get a bachelor's degree "significantly reduces the return to college." Also, the college investment didn't pay off for the bottom 25 percent of graduates. And those who drop out of college fail on both ends: They incur the costs and lose the wage premium.

The report is openly available on the publication site for the New York Fed.