Dear Ms. Baum,
I am writing in regards to the "Education
Pays" report that you coauthored 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 1217%
which is 200250% 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 2565 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
fulltime 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
postgraduation 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 1217%)

$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
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