1. 1 Making the Grade: The Economics of Education Chief of Staff Retreat February 24-25, 2006 copies of this presentation can be found at www.business.duq.edu/faculty/davies

2. 2 The cost of private college has increased 7.9% annually while consumer inflation has averaged only 4.4% annually. Source:Statistical Abstract of the United States, 1995-2006; Current Population Reports, Bureau of Census, 1978-1997; Annual Survey of Colleges, The College Board, 2002

3. 3 The cost of public college has increased 7.8% annually while consumer inflation has averaged only 4.4% annually. Source:Statistical Abstract of the United States, 1995-2006; Current Population Reports, Bureau of Census, 1978-1997; Annual Survey of Colleges, The College Board, 2002

4. 4 The cost of private (public) college has grown from 20% (5%) of household income in 1976 to almost 50% (10%) in 2003. Source:Statistical Abstract of the United States, 1995-2006; Current Population Reports, Bureau of Census, 1978-1997; Annual Survey of Colleges, The College Board, 2002

5. 5 Benefits of a college education vs. a high school education 1.Difference in entry-level compensations. 2.Difference in the growth rates of wages over the course of a career. 3.Difference in the likelihoods of employment.

6. 6 Source:Statistical Abstract of the United States, 2004-2005 Starting compensation is 85% higher for degreed workers.

7. 7 Annual Real Growth in Median Wages from Age 24 to Age 65 (2003) Source:Statistical Abstract of the United States, 2004-2005 Real salaries grow faster for degreed workers by almost 1% annually.

8. 8 Source:Statistical Abstract of the United States, 2004-2005 Likelihood of employment is 11 percentage points greater for degreed workers.

9. 9 (Compensation) (Probability of Employment) = Expected Compensation The median working college graduate earns 112% more than the median working high school graduate. Accounting for the likelihood of employment, the median college graduate earns 144% more than the median high school graduate.

10. 10 $170,000 difference by age 21 High school graduate enters workforce at age 18 and begins to accumulate earnings. College student starts college education at age 18 and begins to accumulate debt. Source:Statistical Abstract of the United States, 1995-2006; Current Population Reports, Bureau of Census, 1978-1997; Annual Survey of Colleges, The College Board, 2002

11. 11 In 1977, difference was $47,000 Source:Statistical Abstract of the United States, 1995-2006; Current Population Reports, Bureau of Census, 1978-1997; Annual Survey of Colleges, The College Board, 2002

12. 12 Cumulative expected difference was $360,000 in 1977 After finishing college, the college student’s earnings begin to outpace the high school graduate’s earnings. Source:Statistical Abstract of the United States, 1995-2006; Current Population Reports, Bureau of Census, 1978-1997; Annual Survey of Colleges, The College Board, 2002

13. 13 Cumulative expected difference was $1.9 million in 2003 Source:Statistical Abstract of the United States, 1995-2006; Current Population Reports, Bureau of Census, 1978-1997; Annual Survey of Colleges, The College Board, 2002

14. 14 Three ways to evaluate the benefit of an investment 1.Breakeven Point 2.Internal Rate of Return 3.Net Present Value

15. 15 Breakeven Point How many years (from matriculation) will it take to recoup investment? Example Invest $10,000 and receive $1,000 each year for 20 years. Breakeven = 10 years 1977 (public college costs) Cost of college plus lost compensation$40,000 (in 1977$) Benefit of college$360,000 (in 1977$) Breakeven:9.1 years 2003 (public college costs) Cost of college plus lost compensation$105,000 (in 2003$) Benefit of college$1.9 million (in 2003$) Breakeven:8.1 years

16. 16 Using public college costs, the breakeven period on a college education has fallen from 9.1 years (from matriculation) in 1977 to 8.1 years today. Source:Statistical Abstract of the United States, 1995-2006; Current Population Reports, Bureau of Census, 1978-1997; Annual Survey of Colleges, The College Board, 2002

17. 17 Using private college costs, the breakeven period on a college education has remained steady at approximately 10 years (from matriculation). Source:Statistical Abstract of the United States, 1995-2006; Current Population Reports, Bureau of Census, 1978-1997; Annual Survey of Colleges, The College Board, 2002

18. 18 Internal Rate of Return The benefit represents what rate of return on the investment? Example Invest $10,000 and receive $10,800 back one year in the future. IRR = 8% 1977 (public college costs) Cost of college plus lost compensation:$40,000 (in 1977$) Benefit of college:$360,000 (in 1977$) Real rate of return (return less inflation):17% 2003 (public college costs) Cost of college plus lost compensation:$105,000 (in 2003$) Benefit of college:$1.9 million (in 2003$) Real rate of return (return less inflation):21%

19. 19 Using public college costs, the nominal return (at 2003 inflation) on a college education has risen from 19% in 1977 to almost 24% today. Source:Statistical Abstract of the United States, 1995-2006; Current Population Reports, Bureau of Census, 1978-1997; Annual Survey of Colleges, The College Board, 2002

20. 20 Using private college costs, the nominal return (at 2003 inflation) on a college education has held steady at approximately 18%. Source:Statistical Abstract of the United States, 1995-2006; Current Population Reports, Bureau of Census, 1978-1997; Annual Survey of Colleges, The College Board, 2002

21. 21 Source:Statistical Abstract of the United States, 1995-2006; Current Population Reports, Bureau of Census, 1978-1997; Annual Survey of Colleges, The College Board, 2002

22. 22 Net Present Value The net future benefit is equivalent to what lump-sum amount today? Example Giving up $10,000 today and receiving $1,000 each year for 20 years is the same as receiving $2,462 today (assuming 5% market interest). 1977 (public college costs) Cost of college plus lost compensation:$40,000 (in 1977$) Benefit of college:$360,000 (in 1977$) Net Present Value:$165,000 (in 1977$) $480,000 (in 2003$) 2003 (public college costs) Cost of college plus lost compensation:$105,000 (in 2003$) Benefit of college:$1.9 million (in 2003$) Net Present Value:$830,000 (in 2003$)

23. 23 The present value of a college education net of tuition has increased by 70% over the past 25 years. Source:Statistical Abstract of the United States, 1995-2006; Current Population Reports, Bureau of Census, 1978-1997; Annual Survey of Colleges, The College Board, 2002

24. 24 Question If higher education is such a good value, why the controversy over the cost of education?  Problem is not cost vs. benefit, but cost vs. liquidity. Liquidity pain points 1.Amount of loan 2.Duration of loan 3.Interest rate 4.Co-signer requirement Summarized in the monthly payment

25. 25 Low Pain Moderate Pain Self-Reported Pain from Student Loan Payments (college graduates) High Pain Source: Trends in Student Aid, The College Board, 2005; College on Credit: How Borrowers Perceive their Education Debt, Nellie Mae Corporation, 2003

26. 26 Liquidity pain points 1.Amount of loan 2.Duration of loan 3.Interest rate 4.Co-signer requirement Summarized by the monthly payment Survey of graduates who are now paying on student debt indicates that, for most students, monthly payments are not a major source of pain. This suggests that co-signer requirements may be the source of perceived illiquidity.

27. 27 Source:Trends in Student Aid, The College Board, 2005 Sources of aid have exhibited little proportional change.

28. 28 Source:Trends in Student Aid, The College Board, 2005 Despite the fact that PLUS loans carry more attractive rates than Alternative loans, as Stafford loans decline, students are shifting toward Alternative loans. Alternative loans have co-signer release option, but PLUS loans do not. Thus, perceived illiquidity may be due to parents being unwilling to co-sign debt long term.

29. 29 Since 1995, PLUS loans have grown 360% while Alternative loans have grown over 1,000%. PLUS Loans Deferrable Lower subsidized interest rate No co-signer release option Alternative Loans Not deferrable Higher market interest rate Co-signer release option

30. 30 Making the Grade: The Economics of Education Chief of Staff Retreat February 24-25, 2006 copies of this presentation can be found at www.business.duq.edu/faculty/davies