Presentation is loading. Please wait.

Presentation is loading. Please wait.

1 Economic Impact of Higher Education – Understanding the Value of Higher Education November 13-15, 2005 copies of this presentation can be found at www.business.duq.edu/faculty/davies.

Similar presentations


Presentation on theme: "1 Economic Impact of Higher Education – Understanding the Value of Higher Education November 13-15, 2005 copies of this presentation can be found at www.business.duq.edu/faculty/davies."— Presentation transcript:

1 1 Economic Impact of Higher Education – Understanding the Value of Higher Education November 13-15, 2005 copies of this presentation can be found at

2 2 Growth in Tuition Over Time Source:Statistical Abstract of the United States, , Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002 College tuition has increased 7% annually while consumer inflation has averaged only 4.5% annually.

3 3 Cost of Education Relative to Household Income Source:Statistical Abstract of the United States, , Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002 College tuition has grown from 20% of household income in 1976 to over 45% in 2003.

4 4 Sources of Benefits to Higher Education Benefits of a college education vs. a high school education 1.Difference in entry-level wages. 2.Difference in the growth rates of wages over the course of a career. 3.Difference in the likelihoods of employment.

5 5 Difference in Entry-Level Wages Source:Statistical Abstract of the United States, Starting salaries 42% higher for degreed workers

6 6 Difference in Growth Rate of Wages Source:Statistical Abstract of the United States, Salaries grow 1.1%-points faster for degreed workers

7 7 Difference in Likelihoods of Employment Source:Statistical Abstract of the United States, Likelihood of employment 15%-points greater for degreed workers

8 8 Expected Earnings (Earnings) (Probability of Employment) = Expected Earnings

9 9 Expected Earnings Annual Earnings (18-65 year olds) The average working college graduate earns 113% more than the average working high school graduate. Expected Annual Earnings (18-65 year olds) The average college graduate earns 167% more than the average high school graduate.

10 10 Compensation-Expense Comparison Source:Statistical Abstract of the United States, , Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002 $184,000 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.

11 11 Compensation-Expense Comparison Source:Statistical Abstract of the United States, , Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002 In 1977, difference was $45,000

12 12 Compensation-Expense Comparison Source:Statistical Abstract of the United States, , Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002 Cumulative expected difference was $375,000 in 1977 Breakeven at age 28 After finishing college, the college student’s earnings begin to outpace the high school graduate’s earnings.

13 13 Compensation-Expense Comparison Source:Statistical Abstract of the United States, , Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002 Cumulative expected difference is $2.3 million in 2005 Breakeven at age 25

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

15 15 Evaluating the Benefit of a College Education Breakeven Point How many years will it take to recoup investment? Example Invest $10,000 and receive $1,000 each year for 20 years. Breakeven = 10 years 1977 Cost of college plus lost compensation$63,000 (in 1977$) Benefit of college$375,000 (in 1977$) Breakeven:11.4 years 2002 Cost of college plus lost compensation$184,000 (in 2002$) Benefit of college$2.3 million (in 2002$) Breakeven:9.1 years

16 16 Evaluating the Benefit of a College Education Source:Statistical Abstract of the United States, , Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002 The breakeven period on a college education has fallen from 11 years in 1977 to 9 years today.

17 17 Evaluating the Benefit of a College Education 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 Cost of college plus lost compensation$63,000 (in 1977$) Benefit of college$375,000 (in 1977$) Real IRR (rate of return after inflation):13.9% 2002 Cost of college plus lost compensation$184,000 (in 2002$) Benefit of college$2.3 million (in 2002$) Real IRR (rate of return after inflation):17.2%

18 18 Evaluating the Benefit of a College Education Source:Statistical Abstract of the United States, , Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002 The real rate of return on a college education has risen from less than 14% in 1977 to over 17% today.

19 19 Evaluating the Benefit of a College Education Source:Statistical Abstract of the United States, , Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002

20 20 Evaluating the Benefit of a College Education 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) Cost of college plus lost compensation$63,000 (in 1977$) Benefit of college$370,000 (in 1977$) Net Present Value:$163,000 (in 1977$) $524,000 (in 2005$) 2005 Cost of college plus lost compensation$220,000 (in 2005$) Benefit of college$2.4 million (in 2005$) Net Present Value:$1,035,000 (in 2005$)

21 21 Evaluating the Benefit of a College Education Source:Statistical Abstract of the United States, , Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002 The present value of a college education net of tuition has doubled over the past 25 years.

22 22 These Estimates are Conservative Reality:More than 70% of students pay less than $10,000 per year, and 50% of students pay less than $6,000 per year. Assumed:No financial aid. Reality:Grant aid averaged $3,600 per student in Assumed:No tuition discounting. Reality:Average 4-Year private institution discounted 39% in Assumed:Tuition is $19,700 per year (average for 4-year private institutions in 2002).

23 23 Implications of Tuition as an Expense vs. Investment Comparing tuition to household income  reduce the cost of loans regardless of the future income generated by the loans. Reduction in liquidity prevents students from leveraging future income gains  students forced to find current income sources to fund educations. Misperception of tuition as an expense, rather than investment, is reinforced. Reducing loan interest rates causes a reduction in liquidity.

24 24 Perceived Burden of Tuition Debt 50% of graduates report at least a “moderate” debt burden when their loan payments rise above 8% of their gross incomes. Low Pain Moderate 20% of graduates report at least a “high” debt burden when their loan payments rise above 12% of their gross incomes. High Pain Source:College on Credit: How Borrowers Perceive their Education Debt, Nellie Mae Corporation, 2003.

25 25 100% of Tuition & Related Fees Financed via Debt Low Pain Moderate High Pain If loan terms were extended to 20 years, banks could charge almost 6% interest on student loans before students started to feel “moderate” pain from student loan debt.

26 26 100% of Tuition & Related Fees Financed via Debt Low Pain Moderate High Pain If loan terms remained at 10 years, but loan payments were made in pre-tax dollars, banks could charge over 8% interest on student loans before students started to feel “high” pain from student loan debt.

27 27 100% of Tuition & Related Fees Financed via Debt Low Pain Moderate High Pain If loan terms were extended to 20 years and loan payments were made in pre-tax dollars, banks could charge more than 9% interest on student loans before students started to feel “moderate” pain from student loan debt.

28 28 Thoughts Outside the Box Conclusion: Reducing loan interest rates solves a problem that doesn’t exist, and may introduce a problem that wouldn’t have existed otherwise.

29 29 Thoughts Outside the Box Government can encourage markets to provide more liquidity  Allow market rates to prevail  e.g. 12% interest rate on college loans  Employers deduct student loan payments from paychecks  No additional cost: use existing withholding infrastructure  Reduces loan default costs  Loan payments capped at 15% (?) of gross income  Life of loan can vary so that loan is paid in full given cap  Automatically provides relief during unemployment

30 30 Thoughts Outside the Box Government can encourage markets to provide more liquidity  Tuition loan payments in pre-tax dollars  Current tax treatment reinforces “tuition as expense”  Possibly revenue neutral; maybe revenue positive  No government cost of loan guarantees  No government cost of interest rate subsidies  No government cost of grants  College graduates generate $700,000 more in wage taxes net of increased Social Security retirement benefits than high school graduates

31 31 Expected Wage Tax Revenue A college graduate generates $740,000 more in wage tax receipts (2003$) than a high school graduate.

32 32 Expected Wage Tax Revenue A college graduate generates $700,000 more in net wage tax receipts (2003$) than a high school graduate, after accounting for increased Social Security benefits.

33 33 Interesting Market Evolution Students charged different rates on the basis of secondary school performance, university performance, selected major, and demonstrated ability.  Students pursuing degrees that lead to better paying jobs will be charged lower interest rates  Incentive to students to pursue more valuable careers impacts at time of enrollment rather than post-graduation (when it is too late to affect behavior)  Interest rates become a market metric of the quality of secondary-school preparation and university education  Incentive to universities to make educations relevant impacts at time of enrollment rather than generations later

34 34 Education as an Export Higher education is a significant U.S. export US exports of higher education increased from $3.5 billion in 1986 to $12.8 billion in  Annual growth rate of 8.4%.

35 35 Education as an Export Source:International Trade Association, 2003, National Center for Policy Analysis, 2001, Bureau of Economic Analysis, Foreign students studying in the U.S. contributed $13 billion to the U.S. economy in Education is the fourth largest source of net exports in the U.S.

36 36 Education as an Export Source:International Trade Association, 2003, National Center for Policy Analysis, 2001, Bureau of Economic Analysis, Education is one of only six categories that has exhibited net export growth over the past fifteen years.

37 37 Some Pending Legislation Pending legislation falls (roughly) into three groups: 1.Legislation to control tuition or tuition growth. 2.Legislation to provide tuition tax incentives. 3.Legislation to provide tuition loan forgiveness.

38 38 Unintended Consequences of Price/Growth Controls  Colleges quote a “sticker price” and then discount from that price on the basis of student need and academic strength.  Colleges use tuition discounting to transfer tuition costs from less needy to more needy students. Unintended consequence: Price/growth controls will prevent the transfer of tuition costs from less needy to more needy students. Unintended consequence: Price/growth controls will result in fewer needy students attending college.

39 39 Unintended Consequences of Price/Growth Controls  Dollars foreign students spend in the U.S. on education and living are part of U.S. exports. Unintended consequence: Price/growth controls will slow U.S. education exports resulting in a worsening of the trade deficit. Unintended consequence: Price/growth controls will prevent the transfer of tuition costs from American to foreign students (via tuition discounting), benefiting foreign students at the expense of American students.

40 40 Unintended Consequences of Tax Incentives  Needy students’ families pay relatively little income tax.  Wealthy students’ families pay no Social Security tax (at the margin). Unintended Consequence: Making tuition payments free of Federal/State taxes, but not Social Security tax, benefits families of wealthy students and has little effect on families of needy students.

41 41 Unintended Consequences of Loan Forgiveness  Proposed legislation allows loan forgiveness for students entering select career fields: public service, teaching, early childhood education, nursing, child welfare, nutrition. Unintended Consequence: Encourages more students to enter these select fields. Wages in those fields will decline. Unintended Consequence: As wages decline in the select fields, the most talented workers will leave for less crowded fields resulting in a decline in the average quality of workers in the select fields.

42 42 Economic Impact of Higher Education – Understanding the Value of Higher Education November 13-15, 2005 copies of this presentation can be found at


Download ppt "1 Economic Impact of Higher Education – Understanding the Value of Higher Education November 13-15, 2005 copies of this presentation can be found at www.business.duq.edu/faculty/davies."

Similar presentations


Ads by Google