One of the nice things about publishing a newsletter is that I get feedback from readers. Thankfully, all of it so far has been enormously supportive. My favorite kind of feedback is a question. And I got a very good question last week, in response to something I had written:

The cost of education

There are many explanations for the rising cost of college education…But a widely under-reported cause, I think, is simply that education is an investment in human capital and—because of the transition to services—the returns on that investment have soared. In fact, by my rough calculations, since the additional income gained from a college education (versus high school) is rising faster than the cost of tuition, one might say college is getting cheaper!

A reader responded:

Is this true? It just seems to be at odds with all the reports of exploding student debt and the burden it is on younger generations.

So I investigated. And….it turns out that, no—it isn’t true. Sorry. But it’s almost true.

College is more expensive, but so are workers

College prices have soared. One year of tuition and room & board at a US college (I blend public and private college costs in proportion to their enrollment) in the 1999-2000 school year was just under $18k. By last year, this figure had risen to just over $30k—an increase of 65% (measured in “today’s dollars”—ie, adjusted for inflation). The only other major category of spending that has increased in price as much over that period has been healthcare.

But—the value of a college education has also risen…by a lot!

The value of college is tough to measure, since it includes things that we don’t later monetize (fun parties attended, new drugs tried, people kissed, life-long friends made, etc). But college also obviously has an economic value, and this is easy to measure: it’s the difference in earnings between those who complete high school only, and those who completed an undergraduate college degree (only).

Twenty years ago, a high school graduate earned just over $26k per year (again, measured in today’s dollars). A college graduate earned $43k. The economic value of a college degree is the difference—$16k. Today, that difference has risen to over $26k—an increase of 57%.

So, college has grown much more expensive, but the value of college has also soared—and by roughly the same amount. Measured in future income per dollar spent on college, the price has stayed about the same.

Today’s chart (above) shows this in graphical, and hopefully more intuitive, terms: twenty years ago, it took roughly 5 years to pay off a college education using the additional earnings from such education. Today, it takes about the same time.

The two are connected

It’s not entirely coincidental that the cost of college and graduate earnings have risen in tandem. There is a mechanism connecting the two: rising earnings for highly educated workers is a reason—perhaps the major reason—for the rising cost of college.

As economist Alex Tabbarok writes:

We have found that the best, albeit perhaps pedestrian, explanation for increasing costs is that the price of the major inputs into education and healthcare—namely, teachers, faculty, physicians, nurses, and so forth—has increased and, secondarily, that we have bought more of those inputs.

Additional issues to explore

If college is—at least by our measure here—no more expensive, why do we seem to be in a panic about it? Please leave your thoughts in the comments below, but I will surmise a few explanations to get the conversation started:

• There are major disparities in earnings by race, gender, college attended, and area of study (some very cool data here; TLDR nursing has one of the highest returns of any area of study, arts and music have the lowest)

• Yes, more expensive college may pay back in higher earnings, but funding college entails an upfront cost—and this upfront cost has increased. Bridging future income and immediate tuition costs may be impossible for students who don’t qualify for student loans. Access to loans may be highly unequal.

• Moreover, taking on debt to fund future income is a high-risk strategy that many students don’t want. Debt may also constrain their choices after college.

What am I missing?