What is the monetary value of a college degree?

While economists have concluded that the value of a college degree goes well beyond the earnings a graduate can realize upon graduation, the Department of Education somehow believes that’s not the case, particularly when it comes to degrees conferred by proprietary colleges.  Under the DOE’s proposed Gainful Employment rule, the worth of proprietary college degrees would be measured strictly on the basis of the student’s college debt in relation to his or her earnings 18 to 30 months after graduation. If the debt-to-income ratio for a group of program graduates exceeds 8 percent, the DOE wants to shut the program down.

The draconian rule is unfair on a number of fronts. First, if the DOE honestly believes the proposed metric is a legitimate measurement, then why doesn’t it want to impose the standard on all public and nonprofit schools? There is considerable anecdotal evidence that more than 50 percent of the degree programs at public and nonprofit schools couldn’t meet the proposed metric; a study by former NCES Commissioner Mark Schneider, one of the most respected education researchers in the country, found that more than 54 percent of the degree programs at the University of Texas would fail the Gainful Employment rule.  The DOE’s refusal to release data quantifying how the nation’s public and nonprofit schools would fare under the Gainful Employment rule is quite telling.

Second, the Gainful Employment metric is increasingly being called into question. The most recent is a Federal Reserve Board of New York September 2 blog by research analysts Jaison R. Abel and Richard Deitz entitled “The Value of a College Degree”, arguing that the monetary value of a degree should be measured over an extended period.  Messrs. Abel and Deitz do a commendable job explaining the crux of their position, advocating the use of the capital budgeting technique Net Present Value (NPV) when calculating a return on investment:

NPV captures the flow of the costs and benefits of going to college over time. During the first four years, the costs of college result in a negative cash flow, followed by a positive cash flow that is received over one’s working career (the college wage premium), taking the time value of money into account (meaning that future years are “discounted” at a standard rate of 5 percent, because money earned in the future is worth less than money in hand today).

The Federal Reserve isn’t alone in concluding that NPV is the best methodology to employ when assessing the value of a college degree.  For example, a 2011 report authored by Nexus Research and the American Institutes for Research entitled “Who Wins? Who Pays? The Economic Returns and Costs of a Bachelor’s Degree”, also concluded that NPV is the best degree monetary measurement, as has Anthony Carnevale, the Director and Research Professor of the Georgetown University Center on Education and the Workforce.

The Department of Education has failed to substantiate their contention that the monetary value of a degree within 18 months of a student’s graduation is a legitimate metric.  We note also that the agency pretty much stands alone in its claim that student demographics have no influence on graduation outcomes. It’s becoming increasingly clear that the policy makers responsible for crafting the Gainful Employment rule would get a failing grade in statistical analysis.

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