[FoRK] Letter to College Board Asking For Clarification/Corrections to Report About Financial Value of College Attendance

[Stephen D. Williams]

Something from one of many, many lists that I receive.
Interesting analysis.
"Michael's Minute" newsletter, based at: http://www.michaelrobertson.com:

Letter to College Board Asking For Clarification/Corrections to Report 
About Financial Value of College Attendance
February 14th, 2008

To: Sandy Baum, Senior Policy Analyst at the College Board
Re: "Education Pays" Report

Dear Ms. Baum,

I am writing in regards to the "Education Pays" report that you 
co-authored for the College Board. I appreciate the College Board 
attempting to get information distributed about the financial value of a 
college education. I think this is necessary and valuable that young 
people and their parents have accurate and objective information so they 
can make informed choices about their future. Your report concludes that 
“[Higher education] yields a high rate of return for students from all 
racial/ethnic groups, for men and for women, and for those from all 
family backgrounds." My belief after analyzing your report is that 
several critical errors were made in the data used to arrive at that 
conclusion. These errors and assumptions mean that the report does not 
represent the true financial picture for the average student.

First you assume that the average student graduates in 4 years when your 
own data says the average is 6.2. This is a meaningful difference 
because those extra 2.2 years means higher costs for attendance and more 
years of lost income. According to your web site tuition costs are 
$12,796 annually x 6.2 years to graduate = $79,310. The impact is 
significant because 50% higher attendance fees and another 2 years of 
lost income would have a dramatic effect on the time to repay the 
investment. The total impact of this inaccurate assumption is $28,151 in 
additional education costs and $53,010 in lost income for a total 
earnings impact of $81,161.

Secondly, for your model you use an artificially low interest rate of 
6.8%. This is the rate for federal loans, but the maximum amount that 
can be borrowed under this program is $23,000. Since only $23,000 may be 
borrowed under the federal program of the total cost of $79,310 that 
leaves $56,310 which would have to be financed with private loans that 
have interest rates of 12-17% which is 200-250% higher. Even if one 
selects the lower end of that range (12%) then the interest paid goes up 
by about $30,000 and of course even higher if one models the 17% number.

A critically important data point when performing income prediction 
model is the expected salary and here I believe you selected an 
incorrect basis from the US Census data of $50,900 annually and $31,500 
for the high school graduate. There are several problems with using this 
number in their calculation. First your model student graduates in just 
4 years which would put them at 22 years old. Yet for the income 
calculations you use the average salary of a 25 and older. A 22 year old 
is clearly not going to make the average salary of a 25-65 year old 
straight out of college. They will typically start at a much smaller 
salary number than $50,900 and any model needs to account for this. 
Those monies are especially impactful in the early years when there is 
huge debt repayments which are required.

In addition, you did not use the US Census numbers for all people 25 
years and older, but instead selected just those that registered they 
were working full-time at the time of census. (I made this same mistake 
in my own initial analysis.) Assuming 100% employment is unrealistic in 
today's fluid economy. It takes time to get a good paying 
post-graduation job and there will likely be periods of unemployment so 
the more accurate numbers to use would be all high school grads compared 
to all college grads. Using these more realistic US Census numbers for 
all people accounts for unavoidably low or no employment periods. Doing 
this narrows the earning gap 14% between high school ($26,505) and 
college grad ($43,143) income levels. And over a 40 year career this is 
an earnings difference of $310,280 for a graduate earning $43,143 
instead of the higher $50,900 number.

Issue


Monetary Impact on College Earning

Incorrect graduation expectation (4 years instead of 6.2)


$81,161

Artificially low interest rate (6.8% instead of 12-17%)


$30,000 (minimum)

Assuming average adult income for young first time job seeker


??

Assuming zero unemployment for entire working career


$310,280

Total decrease in College Earning Power


$421,441


According to your chart, the net difference in income after 40 years 
between a high school and college graduate is under $250,000. If one is 
to adjust the numbers using the changes listed above (-$421,441) then 
the financial benefit of a college education goes negative. Thus it 
would make more financial sense for the average young person to bypass 
college and simply graduate from high school and enter the workforce.

Absent from your analysis is the cost of attending a private 
institution. According to your web site private college tuition is about 
$10,000 per year more than a public school. Over a 6.2 year term this 
would be $60,000 more in costs which must be financed at a high interest 
rate.

Finally, your report says that college yields a "high rate of return for 
students from all racial/ethnic groups, for men and for women." Yet when 
I review the same US Census data your report relied upon I see 
substantially lower annual wages for women and blacks than used in your 
analysis. Women earn just $36,532 versus the $50,900 in your report. 
Hispanic women earn even less at $34,302. Black women earn $41,298 and 
black males earn $41,871. Over a 40 year career those earning 
differences can be over $500,000 which is a dramatic difference. I see 
no data in your report for the claim that college produces a high rate 
of return for women or blacks which have much lower expected salaries.

Since you did not publish the actual formula or make available the 
spreadsheet, it is impossible for me to precisely calculate how these 
issues affect the underlying financial analysis. Perhaps there are other 
factors which I'm unaware of. However, I believe the issues I laid out 
more accurately represent the financial experience of the average 
college student rather than the super student who graduates in 4 years, 
never spends time looking for a job, is never unemployed, and 
immediately garners a job making the average of their superiors.

I'm sure the College Board strives to get accurate information out to 
the public about college. I share in that goal. I would kindly request 
that you evaluate the points I am bringing to your attention and respond 
to my inquiry with a reasoned explanation. Getting the most accurate 
information to the world is extremely valuable when young people every 
day are being asked to make life changing financial decisions about 
attending college.

-- MR