Transcript 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.

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
1
Growth in Tuition Over Time
College Tuition (4-Year Private, $ per year)
$25,000
College tuition has increased 7% annually while
consumer inflation has averaged only 4.5% annually.
$20,000
$15,000
$10,000
$5,000
College Tuition
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
$-
Consumer Prices
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
2
Cost of Education Relative to Household Income
College Tuition as % of Median Household Income (4-Year Private)
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
College tuition has grown from 20% of household
income in 1976 to over 45% in 2003.
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
0.0%
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
3
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.
4
Difference in Entry-Level Wages
Average Earnings for 18-24 Year Olds (2002)
$40,000
Starting salaries 42% higher for degreed workers
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
High School Diploma
College Degree
Source: Statistical Abstract of the United States, 2004-2005
5
Difference in Growth Rate of Wages
Average Annual Real Growth in Wages from Age 24 to Age 60
3.0%
Salaries grow 1.1%-points faster for degreed workers
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
High School Diploma
College Degree
Source: Statistical Abstract of the United States, 2004-2005
6
Difference in Likelihoods of Employment
Likelihood of Employment (% of civilian, non-institutionalized population)
80%
Likelihood of employment 15%-points greater for degreed workers
70%
60%
50%
40%
30%
20%
10%
0%
High School Diploma
College Degree
Source: Statistical Abstract of the United States, 2004-2005
7
Expected Earnings
Average Annual Earnings (2002)
Average
Education
Earnings
High School Diploma
$37,680
College Degree
$80,144
Probability of
Employment
60.3%
75.8%
Expected
Earnings
$22,718
$60,730
(Earnings) (Probability of Employment) = Expected Earnings
8
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.
9
Compensation-Expense Comparison
Cumulative Expected Compensation less Tuition
$140,000
$120,000
High school graduate enters workforce at
age 18 and begins to accumulate earnings.
$100,000
$80,000
$60,000
$40,000
$184,000 difference by age 21
$20,000
$0
-$20,000
-$40,000
-$60,000
-$80,000
18
19
20
21
College student starts college education at
age 18 and begins to accumulate debt.
Age
High School Graduate (2002)
College Student (2002)
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
10
Compensation-Expense Comparison
Cumulative Expected Compensation less Tuition
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
In 1977, difference was $45,000
$0
-$20,000
18
19
20
21
-$40,000
-$60,000
-$80,000
Age
High School Graduate (2002)
College Student (2002)
High School Graduate (1977)
College Student (1977)
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
11
Compensation-Expense Comparison
Cumulative Expected Compensation less Tuition
$4,500,000
$4,000,000
After finishing college, the college student’s earnings begin to
outpace the high school graduate’s earnings.
$3,500,000
$3,000,000
$2,500,000
Breakeven at age 28
$2,000,000
$1,500,000
Cumulative expected difference
was $375,000 in 1977
$1,000,000
$500,000
64
62
60
58
56
54
52
50
48
46
44
42
40
38
36
34
32
30
28
26
24
22
20
18
$0
-$500,000
Age
High School Graduate (1977)
College Student (1977)
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
12
Compensation-Expense Comparison
Cumulative Expected Compensation less Tuition
$4,500,000
$4,000,000
$3,500,000
Breakeven at age 25
Cumulative expected difference
is $2.3 million in 2005
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
64
62
60
58
56
54
52
50
48
46
44
42
40
38
36
34
32
30
28
26
24
22
20
18
$0
-$500,000
Age
High School Graduate (2002)
College Student (2002)
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
13
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
14
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
15
1977
Cost of college plus lost compensation
Benefit of college
Breakeven:
$63,000 (in 1977$)
$375,000 (in 1977$)
11.4 years
2002
Cost of college plus lost compensation
Benefit of college
Breakeven:
$184,000 (in 2002$)
$2.3 million (in 2002$)
9.1 years
Evaluating the Benefit of a College Education
Breakeven on Investment in College Education
12
The breakeven period on a college education has
fallen from 11 years in 1977 to 9 years today.
11
10
9
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
8
Breakeven (years from first year of college)
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
16
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%
17
1977
Cost of college plus lost compensation
Benefit of college
Real IRR (rate of return after inflation):
$63,000 (in 1977$)
$375,000 (in 1977$)
13.9%
2002
Cost of college plus lost compensation
Benefit of college
Real IRR (rate of return after inflation):
$184,000 (in 2002$)
$2.3 million (in 2002$)
17.2%
Evaluating the Benefit of a College Education
19%
Real Internal Rate of Return on Tuition
18%
17%
16%
15%
14%
The real rate of return on a college education has risen from
less than 14% in 1977 to over 17% today.
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
13%
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
18
Evaluating the Benefit of a College Education
Average Rates of Return (1977 through 2002)
25.0%
20.0%
15.0%
10.0%
5.0%
College
Education
NASDAQ
DJIA
S&P 500
BAA Bonds
AAA Bonds
20-Year
Treasury
Bills
6 Month
CDs
0.0%
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
19
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).
1977
Cost of college plus lost compensation
Benefit of college
Net Present Value:
2005
Cost of college plus lost compensation
Benefit of college
Net Present Value:
20
$63,000 (in 1977$)
$370,000 (in 1977$)
$163,000 (in 1977$)
$524,000 (in 2005$)
$220,000 (in 2005$)
$2.4 million (in 2005$)
$1,035,000 (in 2005$)
Evaluating the Benefit of a College Education
Net Present Value (2003$)
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
The present value of a college education net of tuition has doubled over
the past 25 years.
$200,000
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
$0
Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
21
These Estimates are Conservative
Assumed: Tuition is $19,700 per year (average for 4-year
private institutions in 2002).
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 2002.
Assumed: No tuition discounting.
Reality:
Average 4-Year private institution discounted
39% in 2002.
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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.
Reducing loan interest rates causes a reduction in liquidity.
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.
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Perceived Burden of Tuition Debt
14%
12%
10%
8%
6%
4%
High Pain
16%
20% of graduates report at least a “high” debt
burden when their loan payments rise above
12% of their gross incomes.
Low Pain Moderate
Loan Payment as % of Gross Incom e
18%
2%
50% of graduates report at least a “moderate” debt
burden when their loan payments rise above 8% of
their gross incomes.
3%
4%
5%
6%
7%
8%
9%
10%
11%
Loan Interest Rate
20-Year Loan (wage tax exempt)
Source: College on Credit: How Borrowers Perceive their Education Debt, Nellie Mae Corporation, 2003.
24
100% of Tuition & Related Fees Financed via Debt
14%
12%
10%
8%
6%
4%
High Pain
16%
Low Pain Moderate
Loan Payment as % of Gross Incom e
18%
2%
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.
3%
4%
5%
6%
7%
8%
Loan Interest Rate
10-Year Loan
25
20-Year Loan
9%
10%
11%
100% of Tuition & Related Fees Financed via Debt
14%
12%
10%
8%
6%
4%
High Pain
16%
Low Pain Moderate
Loan Payment as % of Gross Incom e
18%
2%
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.
3%
4%
5%
6%
7%
8%
9%
Loan Interest Rate
10-Year Loan
26
10-Year Loan (wage tax exempt)
10%
11%
100% of Tuition & Related Fees Financed via Debt
14%
12%
10%
8%
6%
4%
High Pain
16%
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.
Low Pain Moderate
Loan Payment as % of Gross Incom e
18%
2%
3%
4%
5%
6%
7%
8%
9%
Loan Interest Rate
10-Year Loan
27
20-Year Loan (wage tax exempt)
10%
11%
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.
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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
29
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 $700,000 more in wage taxes
net of increased Social Security retirement benefits than
high school graduates
30
Expected Wage Tax Revenue
Wage Tax Revenue Generated by a Student Over Course of Life (2003$)
Student
High School Graduate
College Graduate
Difference
Federal
State Income
FICA Tax
Total Tax
Income Tax
Tax
(both halves) Receipts
$159,000
$41,000
$217,000
$417,000
$605,000
$94,000
$458,000
$1,157,000
$446,000
$53,000
$241,000
$740,000
A college graduate generates $740,000 more in wage
tax receipts (2003$) than a high school graduate.
31
Expected Wage Tax Revenue
Net Wage Tax Revenue Generated by a Student Over Life (2003$)
Student
High School Graduate
College Graduate
Difference
Total Tax
Receipts
$417,000
$1,157,000
$740,000
Tax Receipts
SS Retirement
Less SS Benefits
Benefits
$327,000
($90,000)
$1,025,000
($132,000)
$698,000
($42,000)
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.
32
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

33
Incentive to universities to make educations relevant
impacts at time of enrollment rather than generations later
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 2002.
 Annual growth rate of 8.4%.
34
Education as an Export
U.S. Net Exports as a Fraction of Total Net Exports
-30.0%
-40.0%
-50.0%
Consumer Goods
(non-food, nonautomotive)
Automotive
Vehicles, Engines,
and Parts
Industrial Supplies
and Materials
Insurance
Services
Foods, Feeds, and
Beverages
Telecommunication
Services
Travel
Education
Capital Goods
(non-automotive)
-20.0%
Financial Services
-10.0%
Business,
Professional, and
Technical
0.0%
Royalties &
License Fees
10.0%
Foreign students studying in the U.S.
contributed $13 billion to the U.S. economy in
2002. Education is the fourth largest source of
net exports in the U.S.
-60.0%
Negative values indicate net imports
Source: International Trade Association, 2003, National Center for Policy Analysis, 2001, Bureau of Economic Analysis, 2003.
35
Education as an Export
Annual Growth in U.S. Net Exports
25.0%
Education is one of only six categories that has
exhibited net export growth over the past fifteen years.
20.0%
15.0%
10.0%
Insurance
Services
Consumer Goods
(non-food, nonautomotive)
Industrial Supplies
and Materials
Automotive
Vehicles, Engines,
and Parts
Capital Goods
(non-automotive)
Education
Travel
Foods, Feeds , and
Beverages
-15.0%
Royalties &
License Fees
-10.0%
Business,
Professional, and
Technical
-5.0%
Financial Services
0.0%
Telecommunication
Services
5.0%
-20.0%
-25.0%
Negative values indicate net imports
Source: International Trade Association, 2003, National Center for Policy Analysis, 2001, Bureau of Economic Analysis, 2003.
36
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.
37
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.
38
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.
39
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.
40
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.
41
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
42