College degree still worth the cost despite the risk

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Ian and Jessica Riley both owe money on their student loans five years after graduation. They are shown at their home in Chicago, Illinois, on October 27, 2011.

Photo: Chris Walker, Chicago Tribune

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A national debate has erupted about the value of a college education. In books, online articles and media commentaries, critics argue that the value of a college sheepskin is vastly inflated and for many people not worth the cost. Hardly a day goes by without me getting a question from recession-scarred parents about whether a college education is worth high cost. My simple answer is: Yes. A college education pays off over a lifetime in jobs and career prospects. That's before taking into account the intangible values that come with a degree, such as deductive reasoning and the history of ideas.

Yes, earning a diploma is expensive. For instance, total borrowing to pay for an undergraduate degree jumped from $50 billion in 2000-01 to $112 billion in 2010-11, according to the College Board. The incomes of college graduates are under pressure, too. The real (inflation-adjusted) earnings of male college graduates ages 25-34 with only a bachelor's degree are down 19 percent from a 2000 peak, calculates Michael Mandel, chief economic strategist at the Progressive Policy Institute in Washington, D.C. The real earnings for young female college grads are down 16 percent since peaking in 2003. More debt and less income is a worrisome combination.

That said, the economic condition of college graduates is far better than their less-well-educated peers. The incomes of less-educated workers have plunged in recent decades. The average college graduate earns about 70 percent more than the typical high school graduate. Even more striking, about three-quarters of jobs require some form of postsecondary education -- from a certificate earned at a community college to an advanced degree from a university.

Here's a way to think through the debate. The return on investing in college has been about 15 percent a year over the past 60 years, according to economists Michael Greenstone and Adam Looney of the Brookings Institution. They say the income return from college is more than double the average annual return in the stock market of 6.8 percent over the same time period. By their calculations, a college education is clearly valuable.

But the only way to create an opportunity to earn a higher return is to take greater risk. And I think the risk of investing in an undergraduate education is underappreciated. How many 18- to 21-year-old undergraduates really know what they want to do when they graduate?

Some end up in a career path with decent wages and benefits, but a number fall into a job with low pay. They could get their diploma during one of the nation's periodic busts. Jobs and careers throughout the economy -- including the white-collar set -- are far more volatile today than three decades ago as Corporate America continuously downsizes, right-sizes and restructures.

In other words, college is a risky -- but worthwhile -- investment.

The lesson isn't to avoid college. It's to focus on lowering the risk associated with earning a degree by keeping borrowing down. Students and their parents should shop around for the best deal possible.

That might mean attending a community college for two years and finishing up at a university or attending an in-state public college rather than an out-of-state rival. Price matters.

Chris Farrell is economics editor for "Marketplace Money." Send your questions to cfarrell@mpr.org.

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