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College as an Investment

Does it pay to go to college? The non-monetary rewards of higher education can be significant and varied. But what if you focus on just the financial benefits? After all, higher education has become an expensive proposition.

The cost of college has increased almost five times the rate of inflation over the last 30 years. This has led to two-thirds of college graduates taking out student loans to pay for school. Even worse, many young people are saddled with debt without obtaining a diploma. Only 57% of students obtain a four-year degree within six years.

The pay-off for getting a degree still remains. While the unemployment rate this spring was 7.4% for high school graduates without college, those who did graduate college had an unemployment rate of 3.9%.

The Brookings Institution noted that the rate of return from a college education is not easy to calculate. It's hard to measure the true effect of college since "the smartest, most motivated people are both more likely to go college and more likely to be financially successful." Still, attending college tends to lead to higher pay over time. The type of degree makes a big difference. Science and engineering majors will likely earn more than philosophy majors. (The study didn't mention who had greater inner peace.)

Student loan debt is piling up. In 2012 it was around $870 billion in total, more than either credit card debt or auto loans. This massive student debt impacts all of society. As Barron's has said: "Graduates lugging huge debt loads with few job opportunities to pay them off are reluctant to buy cars, purchase homes, or start families." The delay in younger people getting on with life has posed a drag on our economy's ability to grow.

Finally, it's not only the costs that have inflated rapidly, so have grades. The Economist has noted that "a remarkable 43% of all grades at four-year universities are A's, an increase of 28 percentage points since 1960." We are now becoming like Garrison Keillor's Lake Wobegon, where "all the women are strong, all the men are good looking, and all the children are above average."

[In a "quiz" last week on this topic, most of the respondents had a fairly accurate sense of the size of student loan debt as well as the benefits of a college degree. But people underestimated inflation. The cost of college has exploded and, with respect to grades, A's are much easier to obtain. Just think how much better you would do if you went back to school!]