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NY Fed Study: Even With Debt, College is Worth the Dough

A new study finds that a degree benefits each graduate $1m more in earnings than a non-graduate, but problems remain.

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To all the college grads out there, sighing over their student loan payments, the Federal Reserve Bank of New York has a message: it was all worth it.

If you regret spending all that money on a college education, you are not alone. About 31% of millennials regret paying for college instead of trying to get a job out of high school, according to Wells Fargo.

Yet thanks to that expensive education, over the course of their lives college graduates are bound to recoup all the money they spent getting their degree – and much more, says the New York Fed.

“Over the past four decades, those with bachelor’s degree have tended to earn 56% more than high school graduates while those with an associate’s degree have tended to earn 21% more than high school graduates,” found the report.

In their lifetime, college graduates are likely to earn about $1m more, the Fed said. Those with an associate degree earn about $325,000 more in their lifetime than high school graduates.

There is a caveat here: the real cost of college education, according to the New York Fed, is the net cost of tuition and the opportunity cost of lost wages – meaning the money students give up by not working full-time during their college years.

And while these numbers sound great in the long term, leaving college to search for work in the current market is not easy, and requires resilience and patience.

Especially if, like most US students, you graduate with about $30,000 in loans.

Strangely, student loan debt, which amounts to about $1tn in the US, is something the New York Fed report authors chose not to incorporate into their analysis on the rate of return of an education.

There are a few other factors in the cost of an education that the authors omitted.

Not only did the report not incorporate student debt, but the tuition estimates used in the analysis are the net tuition costs, which don't include room and board.

The report estimates the total cost of four-year tuition to be $26,000, arguing that the net price of a bachelor's degree is $6,550 a year – well below the annual $14,750 sticker price. At many private colleges, particularly elite ones such as those in the Ivy League, the sticker price is above $50,000.

And the cost of the associate degree, according to the Fed? $0. In fact, less than zero. "[T]he actual cost of an associate's degree was more than fully subsidized by various tax benefits and other form of aid," noted the report.

Opportunity cost

The opportunity cost of going to college – missing out on two or four years of full-time wages – is not that high, found the New York Fed.

The wages that American students miss out on, should they not enter the labor market after high school, totals $96,000 for those pursuing a four-year bachelor’s degree, and $46,000 for those pursuing an associate degree. College graduates are likely to make up for those lost wages within a few years, thanks to the higher pay ensured by their degrees.

What about the debt?

Despite the fact that everyone, from President Obama to Starbucks CEO Howard Schultz, is worried about the student debt crisis that plagues US college graduates, the New York Fed believes that student loans are cheap subsidies.

The authors write:

In exchange for paying interest, people can take out student loans to delay paying their college expenses. Thus, it is not necessary to incorporate such financing options into our rate of return analysis. In face, because interest rates on student loans are often subsidized at below-market rates, student loans generally allow people to earn higher returns than our results would indicate."