The Opportunity Cost of Higher Education

Many bloggers speak about how college graduates head out into the real world carrying large amounts of debt, and how this debt is harmful to these newly graduated students. However, these costs are supposedly mitigated by the idea that a degree from college will help to get you a higher paying job in the long-run. But one cost that is not often talked about is the tangible long-run effects of the opportunity cost of attending college instead of taking a job straight out of high school.

A 2014 article from Forbes outlines the calculations performed by BU economics professor Laurence Kotlikoff. In his article entitled “Study This to See Whether Harvard Pays Off,” Professor Kotlikoff created 4 fictional 18-year-old characters and had each choose different paths regarding their educations and professions.

Joe decides to become a plumber, and doesn’t attend college. Sue gets a bachelor’s in education. Matt also gets his bachelor’s in education, but spends an additional 2 years to get his masters. Jill decides to become a doctor, attends a private college for 4 years, then a medical school for 4 years, works as an intern for 2 years, works in a low-paying residency position for 1 year, and finally gets a job as a general practitioner.” (http://www.forbes.com/sites/thecollegebubble/2014/05/21/do-the-math-how-opportunity-costs-multiply-tuition/)

From the data we have seen regarding how much more money, on average, students make after they have obtained advanced degrees, you would assume that this study would also support these findings (or so we would all hope). One such data chart is depicted below:

Lifetime Earnings
(http://i2.wp.com/republic3-0.com/wp-content/uploads/2014/08/college-earnings.png)

            The simulation of the 4 teenagers’ professional lives was carried-out using earnings data in today’s dollars to determine their likely salaries before taxes, and under the assumptions that retirement occurs at 62 and death occurs at 100.

At age 50:

forbes screenshot(http://www.forbes.com/sites/thecollegebubble/2014/05/21/do-the-math-how-opportunity-costs-multiply-tuition/)

This data looks to be a good thing right?? Maybe not…

Professor Kotlikoff concluded after analysis that Jill, the doctor, did indeed have the highest standard of living by getting to spend $33,666 per year after taxes and healthcare bills (spread across age 19 to 100). However, that is drastically less than her peak earnings of almost $186,000 at age 50. This is because after all of her time incurring school loans and financial debt without the ability to pay them down, she had only about 30 years of significant earnings to spread across the 80+ years of her expected life. As well, she couldn’t afford to save much of her money, because of the immediate need to pay-down her school loans.

Surprisingly, Joe the plumber’s standard of living is almost as high as Jill’s – and he didn’t even attend college! His spending per year adds up to $33,243. Sue the teacher was calculated to have spending power of $27,608, and Matt, the teacher with his masters, has spending power of $26,503 – Matt ended up with the lowest amount of spending of the 4 workers, and yet he was the character with the second-highest level of education.

This simulation effectively highlights the opportunity cost that exists for some students who attend college and do not take these external factors into consideration. Albeit, there are many other factors that would make this model much more complex than what it has incorporated. As well, this study was performed one year ago at this time, so measurements of today’s data may be different. However, taking opportunity cost of not working into account, earnings over one’s lifetime can amount to a smaller value than what it may appear on face value.

Although my views on attending college are not necessarily in-line with this study, it is very interesting to consider this alternate view when thinking about student loans and potential earnings over one’s lifetime.

–Erica Fleming

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2 thoughts on “The Opportunity Cost of Higher Education

  1. krraym16

    Very interesting and worth while reading. As illustrated in the fundamental idea of the Golden rule, the purpose of making these high incomes is to enjoy the fruits of your labor. You make money to have as much consumption as possible. That makes up for the time , effort, and oppurtunity cost for attending college. Unfortunately, paying off loans means you spend the majority of your time saving and not saving to invest or consume. this really brings into account ones perception of who’s better off?

    Reply
  2. Victor Matheson

    I have no issue with Erica’s post, which I thought was great. I do have a problem with Prof. Kotlikoff’s silly analysis. Sure the guy with no degree is going to do great is you assume he is going to get a great job paying way more than the average hs grad and that he will have that job with certainty until the same retirement year as the other professions.

    In reality, that hs grad is likely to have a lower salary, more periods of unemployment, and a lower work life expectancy than kotlikoff assumed while the college grad is likely to do better than the professor assume. Sure he did his calculations correctly given his assumptions, but anyone could make up equally unrealistic numbers showing anything I want the data to show.

    Reply

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