Blame College Wage Premium for Tuition Surge, not Government

The problem with the student loan/college bubble debate is both sides are plagued by predictable biases and flawed arguments. The left believes that making college more accessible and more affordable will improve economic mobility, ignoring or overlooking the high dropout rate. Dropouts get none of the benefits of graduating college but all of the debt of having attended. Also, if everyone has a degree, then the value proposition of the degree goes away. The left ignores that too many high school graduates are woefully unprepared for college, hence the high dropout rate. Something like 50% of college students fail to get a degree within 6 years (not the usual four years, but six, which is crazy.)

The ‘right’ is wrong though to only blame the government for surging tuition costs. Yes, the government plays some role, but not that much relative to other factors. In an earlier post I show how the greatest yearly percentage increase in tuition was in the early to mid ’80s, before many of these programs we see today were enacted, or before ‘college for everyone’ became a priority for the left. Because tuition is so high now, it seems like the change is greater, but this is nominal change instead of percentage change.

I think the most important variable for explaining why tuition is so expensive is the college wage premium, which is the widest ever and shows no signs of narrowing. As long as college grads earn a lot more, tuition will keep going up due to demand. Even after factoring in debt, grads still earn more than non-grads. The proliferation of lucrative 6-figure jobs , especially over the past decade following financial crisis, is also a contributing factor for such demand. In the ’70s or even ’80s, there was no equivalent of the ‘6-figure office job’ like we see today. As multinationals keep growing in size and profits, even relative to GDP, it means higher stakes, and hence higher salaries for talent. Broadcom is worth $250 billion, a 20x increase from 2015 alone, among many other examples of huge companies popping up out of seemingly nowhere. An MBA makes $70k-100k/year strait out of college, versus $50k in the early ’70s (in today’s dollars), which is a huge increase even after factoring in student loan debt.

If not for this earning power, two things would happen: demand for college would plunge, probably back to levels not seen since the 60s. This would put a lot of colleges out of business, particularly low-ranking colleges (which have a worse ROI). The vast majority of people attend college to earn more money, not for the intellectual enrichment of a liberal arts degree. If not for the degree, which is like a ticket to the middle class, no one would waste four years when they could start working immediately out of high school.

As by Bryan Caplan notes in his important, influential book “The Case Against Education,” the value of college is the earning power bestowed by the degree, not the educational value. He gives an example of when class is cancelled, do students feel cheated because they paid for something which was undelivered? Of course not, they are happy to have free time, because because the instruction/education is secondary to the credentialization.

Second, the government would stop subsidizing tuition as indiscriminately, because suddenly college would stop being a ‘path to upward mobility’ but rather just another consumer discretionary good, like SUVs, Disneyland tickets, or NFL tickets. The government sees it as a public good or necessity to make college affordable, because of the increased earning power college confers.

Many low-ROI private colleges are dependent on government aid because their students tend to be so unsuccessful, that such colleges have tiny or non-existent endowments and cannot afford generous scholarships or other aid like Harvard does. Instead of the right attacking Harvard for wokeness, they should instead direct their anger at these low-ROI private colleges for being a ripoff and charging equal or higher tuition for far worse job prospects (and milking the government for aid). Yes, wokeness sucks, but at least Ivy League grads are getting a good ROI and have good job prospects, compared to many of these lesser-known, low-ranking private colleges. Collectively, lesser-known private colleges are much bigger recipients of federal aid, compared to just focusing on top-20 elite colleges, which are wealthy enough to supply their own financial aid without the help of the federal government.

Bootcamps, online learning (such as Khan Academy), and trades schools are not the answer either. Trade jobs may benefit college dropouts, but college still pays way more than the trades, and also trades work requires a lot of training and time. It’s better than service sector work, but the downside is a lot training is required, which is not exactly cheap, costing from $15,000 to $30,000. Employers don’t want to spend more money than necessary training new employees, hence why credentials and certification have become such big industries. Bootcamp grads tend to be woefully deficient in skills and also have a hard time finding good jobs, also bootcamps can be very expensive and inflate their success metrics. I am not saying that college is the answer, but it’s not bootcamps.