Is College Still a Good Investment?

Rising college costs and heavy debt have raised doubts about the payoff from a college degree.

Douglas Webber is an associate professor in the economics department at Temple University in Philadelphia, where he focuses on labor and the economics of higher education.

A recent study from the Federal Reserve Bank of St. Louis suggested that the value of a college education has declined. Is college still worth the cost? For the average person, college is still overwhelmingly a good decision. But like any investment, there are risks. The potential negative consequences are greater now than they were for previous generations. Not only are you taking time out from the labor market, but you're paying more to attend college. Plus, many students are taking out debt that's nearly impossible to discharge in bankruptcy. But the biggest risk is not graduating, because you still have the debt but don't have a degree.

Do workers who graduate with a bachelor's degree still out-earn workers without a college degree? Yes, but the price of attending college has gone up, so the net return of a college degree has gone down a little bit. Still, over a lifetime, college graduates earn about $900,000 more relative to high school graduates. Even if you discount that figure to take into account the types of students who go to college, the "opportunity cost" of not being in the labor force and other factors, the net value of a college degree is still about $350,000 over your lifetime compared with a high school degree.

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How does the major a student selects affect the outcome? The choice of a major may be the single biggest financial decision people will ever make. If you list majors from top to bottom based on earnings, it's roughly a $2 million differential. But lifetime earnings shouldn't be in the top three things that you base your decision on, in part because job satisfaction matters. There's an economic reason, too. If you compare average earnings for an English major to, say, an accounting major's earnings, accounting looks a lot better. But frankly, if that person is not very good at accounting, they'll earn less than the average accounting major. In that case, you may maximize your earnings potential by choosing English.

How does student borrowing factor into the equation? Debt is a huge factor. If you take out a lot of debt for a low-earning major, the chances that it's going to pay off are less than 50-50. If you're an engineering major with a generous financial aid package, the chances it will pay off are virtually 100%.

And there are huge differences between federal student loans and private student loans. The protections that exist within the federal Stafford loan program are very strong and limit the consequences if you're unable to repay your debt. Private student loans don't have those protections. If you're attending a lower-cost school, you might be able to get most or all the way through college with only federal loans.

What should students and families consider when choosing a school? Finding a school that's right for you is a very personal decision. But it's important to look up a school's graduation rate, average earnings of graduates and other statistics on to see if the school does a good job of getting students through to graduation and helping them find good jobs.

Students generally have a good sense of the value of different majors. They know that economics, engineering and finance are the high-earning majors and that music, humanities and the liberal arts are low-earning majors. But they have a really poor sense of the magnitude of the difference. Students should make a list of the majors they're considering and then look at the projected earnings for each. Understanding that won't change a lot of decisions, but they should be aware of the labor market they'll be going into.

Kaitlin Pitsker
Associate Editor, Kiplinger's Personal Finance
Pitsker joined Kiplinger in the summer of 2012. Previously, she interned at the Post-Standard newspaper in Syracuse, N.Y., and with Chronogram magazine in Kingston, N.Y. She holds a BS in magazine journalism from Syracuse University's S.I. Newhouse School of Public Communications.