How do you pay for college? Consider the risk
“A college degree is one of the best investments you can make. If you want to be financially successful in life, go to college. High school students hear this conventional wisdom from everyone from education policy buffs to high school guidance counselors and parents. The statistics back it up: Bachelor’s degree holders can expect to earn hundreds of thousands of dollars more over the course of their careers than high school graduates.
Economist Beth Akers says it’s true, but that’s only half the story. In finance, investors know they can’t just look at the average return on a stock or bond. They should also take into account the risk that the asset will not be profitable. But somehow that little common sense is largely left out of the higher education discussion. University has a high return, but it can also be a risky proposition.
“Making College Pay,” Akers’ new book, is written as a practical guide for prospective students to navigate risk-reward trade-offs as they pursue their education beyond high school. Akers calls this the advice she wished she had received at 18. But the book should also inspire the rest of us to reconsider the way we talk about higher education.
Akers shares the story of buying his first home. The process involved wading through a mountain of paperwork and jumping through a series of bureaucratic hoops before you could close the deal. There were income and credit checks, building inspections, and insurance contracts to complete. The process could be maddening, but everything was aimed at eliminating the sources of risk. Buying a home is usually a good investment, but not so much if it’s built on top of an active volcano.
Higher education is different. “The road to college is lined with cheerleaders telling aspiring students that a college degree will be a golden ticket to success,” Akers writes. Guidance counselors see college as the natural next step for most high school students. The federal government offers students tens of thousands of dollars in grants and subsidized loans, with minimum quality guarantees. We expect teens to make some of the most important economic decisions in their lives before they are legally allowed to drink alcohol.
Often, they make these decisions with minimal knowledge of the risks associated with each turn in the road. One of the biggest sources of risk is not graduating. People who drop out don’t get the financial return on the degree, but are stuck with student debt anyway. Taking more than four years to complete college is also a major source of risk: extra years in school means less time in the workforce, with correspondingly lower lifetime earnings. Another problem: some majors do not have the benefits expected of students.
There are also sources of risk that are completely beyond the control of the student. If she graduates in a recession, her college degree may not prove the guaranteed ticket to the well-paying job she hopes for. Skills learned in college can also become obsolete due to technological change.
Consideration of risk can and should change student decisions. A more expensive but better university may be a better bet if it lowers the risks. Public community colleges are cheap, but they have extremely high dropout rates. Cheaper tuition fees aren’t good for much if students don’t get the returns they promise. Many of the proposals to lower the final price of college education, such as larger Pell Grants or free tuition, do little to reduce risk.
What would reduce the risk? In the financial sector, investors use insurance for this purpose. Akers is profiling some schools, like Adrian College in Michigan, that have introduced guarantees to cover loan repayments from their former students if they don’t find a good job. A company is now offering “diploma insurance” to reassure students if they don’t earn the salary promised for their study program.
But every investor knows that the best way to reduce risk is through diversification. Don’t put all your eggs in one basket and don’t put all your money in one stock. Yet the standard post-secondary education model encourages students to invest almost all of their time and money in a single degree.
Akers devotes a chapter to the “unbundling” of higher education. Alternatives to the traditional college model, such as competency-based education and learning, hold promise but are widely seen as complements to the existing higher education infrastructure. A fully diverse post-secondary experience would seem unrecognizable compared to the status quo.
While Akers doesn’t take the argument that far in his book, adequate diversification of post-secondary education would likely make a four-year college degree a thing of the past. Instead, people can jump straight from high school to the workforce, but sometimes take courses throughout their lives to gain experience in various skill sets to meet the changing needs of the economy. Short-term prices that do not accumulate to some extent would reduce the risk of non-completion. In addition, these classes would be integrated into jobs to ensure that students’ skills match the needs of the labor market.
Providers in higher education would hate this idea. Why sell one-to-one courses when you can sell a four-year all-in-one degree? Regulation and funding are built around the traditional model of higher education, so it’s hard to reverse it. But the risk in higher education will only go away if something major changes. We owe it to the students to try.