Introduction
Over the past several decades, the
popularity of college education has been increasing significantly. According to the Bureau of Labor Statistics,
approximately 65.9% of high school graduates enroll in college.1 Of
these enrollees, about 60% attend 4-year institutions seeking degrees most
commonly in business, social science and history, health professions, and
education.2 Finally, the overall graduation rate for 4-year
degree-granting institutions was 59%. By
working through these numbers, we find that just over 23% of high school
graduates go on to complete 4-year college degrees.
Given the fact that nearly a quarter
of high school graduates complete 4-year college degrees, it is important to
consider the value of post-secondary education.
There are two economic models at play here. The first is the human capital model which
reasons that those who continue their education receive skills through
education that are valued in the labor market.
The second is the signaling model, which conversely reasons that those
who attend higher education institutions are simply signaling their
pre-existing abilities by attaining a degree.
By analyzing the implications of these two perspectives, we can arrive
at useful conclusions about the value of education.
Background
One of the most appealing aspects of
obtaining a 4-year college degree is the wage premium that arises due to this
additional education. The National
Center for Education Statistics finds that the median earnings for the average
adult holding a bachelor's degree is about 50% higher than the respective adult
with only a high school diploma.3 Interestingly, those who go to
college but do not obtain a degree typically earn only 6.8% more than high
school graduates.
Many education studies assume that
the relationship between education and earnings is linear. This makes sense under the human capital
model because increases in education should lead to increases in human
capital. However, the data suggest that
this may not be the case.4 In
fact, those who drop out just prior to graduation, completing up to 96% of
their degree, still hover around a 10% wage premium. This empirical evidence is highly suggestive
of a so-called "sheepskin effect" that supports the assumptions of
the signaling model. The sheepskin
effect is the impact of earning a degree on wage premiums. The fact that someone can finish only a
slightly higher degree of education and yet is expected to earn a nearly 40%
wage premium over the person that dropped out just prior to graduating implies
that it is the degree that carries the most value, not the human capital
increases through education.
Proposal
This analysis forces us to consider
several structural issues surrounding education. One of the most important issues to consider
is who pays for higher education. The
federal government spent 146 billion dollars in academic year 2010-2011 in the
form of grants and loans to students.5 However, we must ask
ourselves if it is appropriate for the federal government to subsidize
education when the data suggest that education does little to increase
productivity through human capital increases and truly acts as more of a signal
of already existing abilities.
My proposal is that government
subsidization of higher education spending should be significantly reduced or
phased out. The reasoning here is that
government subsidy is causing an inefficient allocation of resources to
education. Since education evidently
does not provide useful increases in the human capital stock but rather only
signals the students most innately suited for the workforce, it is not
necessary for government to correct for the "market failure" of a
less than socially optimal level of education.
Congress should eliminate loans for anyone other than perhaps the truly
low income students who have little chance at being able to attend college
without some form of assistance. Even in
the case of low income individuals, I would recommend that grant programs be
converted into loan programs as to not distort the value of education.
Analysis
Furthermore, government subsidy in
the education market causes several additional moral and economic issues. Since 1965, the federal government has
increased real spending on funding for higher education continuously. This increasing subsidy has several adverse
effects in the market for education.
Americans have been increasing their demand for education continuously
as well, especially given the fact that it is becoming a larger social norm for
women to become educated. This increase
in demand pushes prices higher.
Normally, these increases in prices would be restrained by consumer
surplus, but the federal government, acting as a third party, has cushioned the
cost of tuition thus diminishing the budget restraint of prospective students.6
Although the federal government has
hugely inflated the sticker price of college, federal aid has probably allowed
more students to attend college granted that enrollment increased about 48%
between 1986 and 2006.7 However, this likely caused additional
distortions outside of simply rising prices.
More students required remedial work and were less likely to be able to
handle the increased academic rigor of college - causing them to drop out. This has likely placed downward pressure on
the quality of academic institutions as they seek to increase retention rates
by lowering the standards and rigor of their courses. This is further evidenced by the fact that
literacy among college graduates decreased at similar rates that enrollment
grew between 1990 and 2000.8
The moral issue surrounding
government subsidization of college students is that it is wrong to take money
from taxpayers in order to fund college students looking to bolster their
future income. It is particularly unfair
when you consider that many taxpayers did not go to college themselves and are
indeed paying for someone else to become wealthier. This extracts money from efficient users and
transfers it to less efficient students who have not earned the aid. Moreover, by ensuring that aid recipients bear
the costs of education provides incentives for those best motivated and
prepared to succeed in higher education to attend school.
Conclusion
The proposed method of eliminating
government grants to college students in favor of loans to only means tested
individuals would work to correct the distortions caused by a high level of
government spending in the education market.
Additionally, decreasing government subsidy in this market would work to
lower the sticker price of education, increase the value of education, and
increase the quality of academic institutions.
References
1. U.S. Department of
Labor, Bureau of Labor Statistics. (2014). College
Enrollment and he Work Activity of 2013 High School Graduates. Retrieved at
bls.gov/news.release/hsgec.nr0.htm
2.
U.S. Department of Education, National Center for Education Statistics. (2013).
Digest of Education Statistics, 2012 (NCES 2014-015), Chapter 3.
3. U.S.
Department of Education, National Center for Education Statistics. (2013). The
Condition of Education 2013 (NCES 2013–037)
4. Skalli, A. (2007). "Are successive
investments in education equally worthwhile? Endogenous schooling decisions and
non-linearities in the earnings–schooling relationship." Economics Of
Education Review, 26(2), 215-231.
5. U.S. Department of Education, Federal Student
Aid, Title IV Program Volume Reports, Direct Loan Program, Federal
Family Education Loan Program, Grant Programs. Retrieved from
studentaid.ed.gov/about/data-center/student/title-iv.
6. Vedder, Richard. Going
Broke by Degree: Why College Costs Too Much. Washington:
American Enterprise Institute, 2004.
7. Cato Institute, Cato Handbook for Policymakers,
7th Edition
8. National Assessment of
Adult Literacy, “A First Look at the Literacy of American Adults in the 21st
Century,” 2006, p. 15.
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