College tuition in the US has been growing faster than inflation since the mid-1980s.1 Tuition plus fees averaged $23,000 for a public college and $46,000 for a private college in academic year 2014–2015.2 The rising cost of attending college, along with the student loan crisis and the slack job market in the US, has led many commentators to ask whether a college education is still worth the price tag.

The value of education probably is one of the most frequently examined questions by economists since the canonical work of Jacob Mincer 40 year ago. In the classical economic framework, the value of education is discussed as the return to investing in human capital. Individuals invest by paying tuition, fees, and foregoing earnings while in school. In return, they expect to receive higher earnings over their lifetime. Economic studies on this topic are collectively referred to as the ‘returns to education’ literature. Although Mincer was focused only on earnings, economists no longer restrict the returns to education to financial returns, and have also examined outcomes such as health, longevity, and psychosocial characteristics.

Most estimates of the returns to education suggest that one additional year of schooling raises earnings by 5% to 10%, everything else being equal, depending on the model and data used (see, for example, the comprehensive survey by Card 1999). Economists have also found that, measured in this way, the returns to education have changed significantly over time. For example, the returns to college education rose significantly since the 1980s, when the demand for college-educated employees increased due to the development in information technology (see, for example, Autor et al. 2008, Goldin and Katz 2007, Lemieux 2006, Card 1999, Katz and Autor 1999, or Katz and Murphy 1992).

Considering both risk and return in human capital investments

This conclusion is based on the difference between the average earnings of two otherwise-identical individuals with different levels of education. In other words, it measures the expected return to investment in human capital. However, investment should be evaluated taking into account both risk and return. Trade-offs between risk and return play a central role in standard financial and economic models of investment in physical capital. Think about the role of risk in financial investment for a moment – everything else being equal, a risk-averse agent would prefer a less risky portfolio. Because most human beings are risk-averse, we would attach a higher value to a low-risk portfolio than a high-risk one, even if the two portfolios have the same expected returns. Just as financial risk affects the value of an investment portfolio, earnings risks should also affect the value of college education.

The literature on the returns to education has largely focused on average returns without giving full consideration to risk. College-educated workers are less likely to experience unemployment than workers without a high school diploma, but they also face much higher uncertainty in their career paths and lifetime earnings. Furthermore, Moffitt and Gottschalk (2008), Cunha and Heckman (2007), and Gottschalk and Moffitt (1994), among others have documented significant increases in earnings volatility since the 1980s. It is therefore pertinent to consider how taking these into account might impact the previous conclusions regarding the value of education and how it has evolved over time. This is what we do in our recent work (Brown et al. 2014). We also account for the progressive tax and social security system, both of which reduce the dispersion in after-tax lifetime expected earnings across individuals.

The risk-adjusted lifetime value of college education

Calculating the risk-adjusted value of college education naturally requires assumptions about individual risk preferences, and thus we report a range of valuations that depend on risk aversion. We estimate the risk-adjusted value of college education to be between $225,000 (for very risk-averse people) and almost $600,000 (for less risk-averse people). These correspond to increases in total present-value lifetime wealth of 35% to 48%, even after adjusting for risk.

Table 1. The risk-adjusted lifetime value of college education

We then study how the changing earnings volatility affects the value of college over time, and we find that the value of college education actually decreased from 1968–1980 to 1991–2011 by almost $50,000 due to increasing earnings risk for college graduates, even though the average expected lifetime income has increased by about $150,000 (the result documented in the previous literature).

Table 2. How changing earnings volatility affects the value of college

It is nevertheless important to point out that even in the most conservative estimates the value of college education is still positive even after we account for the (direct and indirect) cost.[RB1]  The rate of return to attend a public (private) college is 76% to 353% (74% to 180%), depending on individual risk preference. Hence, the value of college education is still quite large and our results suggest that college education still a worthy investment.


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Brown, J R, C Fang, and F Gomes (2014), “Risk and Returns to Education Over Time”, Working Paper, University of Illinois at Urbana-Champaign, University of Michigan, and London Business School.

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This article is published in collaboration with VoxEU. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Jeffrey R. Brown is William G. Karnes Professor of Finance at the College of Business, University of Illinois. Chichun Fang is an assistant research scientist at the Institute for Social Research, University of Michigan. Francisco Gomes is a Professor of Finance, London Business School and a Research Affiliate of CEPR.

Image: Profile of students taking their seats for the diploma ceremony at Harvard University in Cambridge REUTERS/Brian Snyder