The Economics of Higher Education: Why College Is a Worthwhile Investment

10/19/2012 06:12 pm ET | Updated Dec 19, 2012

"Economists have long focused on the concept of education as an investment that, on average, pays off well over the long term, for both individual students and society as a whole. Yet many families lack faith in that premise." (IHEP, "Is College Affordable?")

Education is the single largest expenditure for state and local governments in the U.S., accounting for 30 percent of their allotted budgets. Of that total education spending, 40 percent is spent on higher education -- about $386 billion per year (Gruber, Public Finance and Public Policy). Why are local and state governments choosing to allocate such a significant portion of their budgets to higher education? Because postsecondary education is a valuable investment in human capital that has beneficial outcomes for individuals as well as for society at large.

Earlier this year, President Obama stated that higher education is "an economic imperative," explaining that, "at a time when the unemployment rate for individuals with at least a college degree is about half that of the national average, [higher education] has never been more important."

Despite the attention prominent politicians and government officials continue to give the topic of educational attainment, there is still debate about whether college is a worthwhile investment.

Skeptics are quick to claim that jobs are scarcer for college graduates and question whether or not a college degree is a lousy investment. These claims are tainted, however, with significant misconceptions about the benefits of postsecondary education and, more significantly, the costs of attending college.

IHEP asserts that, "Postsecondary education is undoubtedly a long-term investment that benefits both individual students and society as a whole." Joe Buhrmann, from COUNTRY Financial, also stated, "Even with the cost of college rising faster than inflation, a college degree is more valuable than ever." But why are economists and researchers so confident in the value of an investment in higher education?

The Benefits:

It is becoming increasingly important for adults to attain higher education degrees in order to become successful in the workforce. Not only is unemployment twice as high for individuals with only a high school diploma compared to individuals with a postsecondary degree, but research shows that the growth in employment in the past two decades has been entirely due to increases in college-educated workers.

Looking forward, the need for college-educated workers continues to grow. By 2018, two-thirds of new and replaced jobs will require some form of post-secondary education. Additionally it is estimated that "14 million jobs requiring postsecondary education will go unfulfilled in the next decade," demonstrating that our economy is not faced with a lack of jobs, but rather a lack of skilled workers to fill the positions employers demand.

College graduates' growing worth in the workforce translates into increased earning potential. Individuals with a bachelor's degree make on average 84 percent more over a lifetime than high school graduates.

But if obtaining a higher education degree is associated with such considerable economic benefits, why is it that only 57 percent of adults believe a college education is a good investment?

According to IHEP's recent findings, people often perceive college affordability to be worse than it really is: "People believe that published prices are higher than they actually are and many students and families are unaware of the magnitude of the grant aid and tax credits available to them." These misconceptions lead to many people overestimating the cost of obtaining a postsecondary degree.

The Costs:

It is important to note that IHEP's statement that "the public significantly overestimates the price of college," is not an argument against the claim that college is expensive. For the 2011-2012 academic year, the average cost of tuition and fees was $28,500 at private colleges and $8,244 for state residents at public colleges (College Board). These are inarguably significant numbers. The point being made is that fixating on the "sticker price" of higher education and thinking about college as an annual, out-of-pocket payment is not the correct way to approach postsecondary education costs.

While the cost of college may be overwhelming, it is important to recognize that the net price -- the price students and families actually pay -- is often significantly less than posted tuition prices. Many different forms of grant aid, loans, and tax credits are available to students and their families to decrease tuition prices. In addition to the $169 billion state and local governments spend annually on their higher education institutions (much of which is put towards subsidized tuition), the government awards $15 billion in grants to about 5.5 million students, provides $8 billion per year in tax credits, and grants over $85 billion in loans (Gruber, Public Finance and Public Policy).

These governmental efforts combine to make the average net price of higher education significantly less than tuition prices. For example, in the U.S. in 2007-2008, "low-income students received enough grant aid on average to cover the entire tuition and fees at public two-and four-year colleges" (IHEP, Is College Affordable?).

Additionally, the public view needs to shift to see college degree attainment as a long-term investment. Tuition is typically framed as an annual payment, even though the benefits of a college degree returns on average 15.2 percent per year and are realized for many years after graduation.

Investing in higher education is the best bet an individual can make to secure a place in the workforce and actualize one's earning potential. By comparing the costs and benefits of higher education, it becomes explicitly clear that college is in fact a worthwhile investment.