EVENTS

Date:	Monday, March 20, 2006
Time:	9:30 AM -- 11:00 AM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

March 2006

Is College Still Worth the Cost?

The average cost of obtaining a college degree has risen precipitously over the past decade. Policymakers, parents, and students alike have grappled with the implications of this ever-increasing price tag for higher education. Some suggest that the price of college is so steep that we are currently graduating a generation of young adults mired in debt. Critics argue that the negative effects of student debt are outstripping the positive effect of increased earning potential. Other recent studies suggest, however, that the cost of a college education--regardless of its exponentially increasing price--does in fact remain a sound investment for the future. How should policymakers, universities, and students themselves think about this issue? What relevant questions should they be asking? To what key points should all interested parties be alert? A panel of experts addressed these questions at a March 20 AEI discussion designed to dissect the philosophical, economic, and practical implications of the cost of higher education in America.

Anya Kamenetz
Author, Generation Debt: Why Now Is a Terrible Time to Be Young

Ms. Kamenetz sought to represent the student's perspective in the debate about college cost. She began by relating the personal story of one of the indebted students she interviewed for her book, Generation Debt. The young woman, "Cindy," faced crippling debt as a result of the student loans she took out and deeply regretted her decision to take on the financial risk of attaining a bachelor's degree.

The average indebtedness of a college-going student is approximately $20,000. This is the first generation of children in American history expected to put up so much capital for college and incur that much personal financial risk. Despite this hurdle, young people are entering into undergraduate programs in increasing numbers. When we consider whether college is worth its high cost, what must ask ourselves whether the federal government is making good use of the money it spends on education. The problem is not the amount of money spent by the government; the problem is the way that student loans work.

There are three entities that incur risk in the student loan industry: the lender, the student borrower, and the government. The risks for lenders are small. Sallie Mae, the second largest company in America, rakes in staggering yearly profits through their government-backed and private student loans. The risk for government is similarly negligible. The risk for the individual student seeking these student loans, however, is huge. Only 35 percent of students who enter college complete their undergraduate degree within four years. Overall about half of students complete their degrees within six years.

There is a 45 percent income advantage for individuals who have earned their bachelor's degree. However, fewer than half of all entering college freshman will ever achieve this degree and the $1 million dollar added lifetime earning power that a BA adds. Furthermore, a student entering college takes on a minimum of four years of lost earning potential, betting that the investment will pay off in future earnings.

The unfortunate Catch-22 of student loan programs is that lower-income students are taking on higher levels of student loans. And these lower-income students are statistically less likely to complete their degrees and achieve the earning potential necessary to pay off their loans. Therefore, these factors compound the risk for low-income students. The system was designed to help students who would otherwise be unable to pay for college; ironically, it is these students who are being hurt the most by the current system.

The United States is no longer the world's education leader. In order to remain competitive in the global marketplace, fundamental changes need to take place in the way in which Americans pay for college. The incentive structure needs to change. Currently, undergraduates take on high upfront cost to pursue a degree. A possible way to mitigate this would be to tie repayment of these loans to an individual's earning power upon finishing their degree. If loan repayment was tied to the income levels attained after degree completion, fewer students would slip into high levels of student loan debt. Moreover, there would be greater incentive for students to pursue their bachelor's degree to completion if repayment of loans was directly tied to an individual's ability to earn enough after college. This form of social insurance would lessen the risk faced by individual students, particularly those from low-income families, and would prevent more students from falling into serious debt.

Martha Lamkin
Lumina Foundation for Education, Inc.

We can think about the cost of college in two ways: the cost incurred by families or the total cost to society. One of the problems we face in discussions such as these is that our society has not quite decided precisely who it wants to help, and which of these two factors should take priority.

The mission of the Lumina Foundation is to advance the prospect of higher education for every American, especially traditionally underserved populations like minority and low-income students. The macro benefits of higher education are immense. Ensuring higher levels of degree attainment would help the national economy, lower crime rates, increase volunteerism, and usher in a host of other positive influences. Statistics show individuals who complete their bachelor's degree enjoy lower rates of unemployment, higher salaries, improved work conditions, improved health, and longer lives. The global economy calls for a more numerous and more highly educated workforce. We are not up to meeting this challenge as things currently stand.

Policymakers have not created policies that determine the target population in need of most assistance. Eighty percent of the population is being served by state and local community schools. Elite private institutions which traditionally have much higher costs attached to them serve only 20 percent of students. Thus, when policymakers and foundations think about improving student loans, we must keep the majority in mind and work towards improving college access for traditionally underserved sectors of the population.

Creating a system in which more people are able to attain a college degree requires lowering the cost to the individual. One new initiative Lumina has started is entitled, "Making College Affordable." This initiative isolates three concurrent objectives policymakers should work toward when formulating reform: reduce the financial cost to the individual, create incentives, and reduce the time to degree.

Susan Dynarski
Kennedy School of Government, Harvard University

The benefits of completing an associate or bachelor's degree are considerable when compared with statistics on earning potential of high school graduates, associate degree holders, and those with bachelor's degrees. The median income for an individual with a BA is roughly 160 percent higher than that of a high school graduate. For those with professional degrees, this figure jumps to 286 percent higher. Simply put, there has never been a worse time to not be a college graduate.

Tuition prices are lower than you think. The press and public misplace their focus on the sticker price of elite private institutions, which are exponentially more expensive than a comparable education at a public or community institution. Seventy-seven percent of the college-going population attends some form of public college. Public policy needs to address the needs of the majority. Furthermore, the sticker price for college does not equal the net price paid for a typical college degree. Tax credits, deductions, grant aid from federal and state governments, and academic scholarships dramatically lower the cost of college. The $20,000 figure quoted by Ms. Kamenetz for average indebtedness only applies to students at private colleges. For a public school bachelor's degree, the average monthly payment on student loans when spaced out over fifteen years is $125.

There continue to be troubling ethnic and socioeconomic gaps in college attendance and completion. Thirty-two percent of white non-Hispanics complete their bachelor's degree within four years, compared with a shockingly low percent of Hispanics. Gaps exist even among the academically proficient. Among high school students with the highest overall math scores, those from high-income families are significantly more likely to attend college than those in the lower income bracket.

Our system for funding college is at fault. Student aid is ill-designed for those who need it most. The aid system is complex and unwieldy, especially for first generation college students and non-English speakers. A proposed solution: run a radically simplified aid process through the tax system, using information already collected by the IRS.

On average, going to college is a great deal. However, for some the debt burden is too high. A solution would be to run loan payments through the tax system, capping payments at a certain percentage of a graduate's income. Models of this method already exist in New Zealand, Australia, and England.

AEI research assistant Hilary Boller prepared this summary.