Back to Social Benefits of Going to CollegeBy Amy L. Watts
From Education and the Common Good
pp. 27-32, published 2001
The most valuable of all capital is that invested in human beings.
—Alfred Marshall
Nobel Laureate Economist
We turn now to the central question posed at the beginning of this report: do the benefits of increasing the educational attainment of more Kentuckians beyond the secondary level outweigh the costs to our state? We consider the benefits outlined in the previous chapter and the costs of Kentucky’s eight publicly supported institutions of higher education.(1)
This section summarizes the lifetime values of a selection of benefits from the previous section and describes the types of costs incurred in attending Kentucky’s eight public four-year universities. Finally, it compares these benefits and costs, revealing the estimated total value to society of increasing the level of education for the typical Kentuckian from that of a high school diploma to a bachelor’s degree or higher.
On the surface this question seems relatively simple, but higher education financing is complex. Earlier in this report we distinguished between the instructional costs of a postsecondary institution and the costs of its other functions, such as organized research and public service. Since this report focuses on the “going-to-college” aspect of higher education, we use instructional costs for the cost-benefit analysis.(2)
Calculating instructional costs per student can be tricky. The usual practice is to divide the costs among students and express them on a per student basis. However, given the rise in nontraditional students and part-time attendance, the method used here calculates costs per full-time equivalent (FTE) student.(3) As noted previously, all costs are related to attending one of the eight public universities in Kentucky. In 2000 the state spent approximately $6,633 per FTE student per school year at one of the state’s eight public institutions.(4) The present value of this expenditure over four years is approximately $24,626(5) and represents what the state spends to provide the average Kentucky student with a college education. In the final comparison of social benefits and their related costs, this is the relevant cost figure that should be used.
However, a higher education is not cheap, and the student and his or her family must also pay a portion of the expense. Tuition and fees are the student’s “price tag” for college. In 2000, a student spent approximately $3,719 on average to attend one of Kentucky’s eight publicly supported institutions.(6) Extending this expense over a four-year period and expressing it in present value terms, the total “price” of a four-year degree in Kentucky is approximately $13,810.(7)
Full-time employment is usually not an option for a student while attending college.(8) The salaries or wages a student gives up while going to school are referred to by economists as the opportunity costs of pursuing a degree in higher education. The average annual wage for a Kentucky man with a high school diploma or less is approximately $28,921. For a woman, the yearly wage is less, at approximately $20,713.(9) A typical man in Kentucky will give up approximately $107,374 in wages to earn a four-year degree, while a woman will lose approximately $76,900 over this same period.
While tuition and fees and foregone earnings are important in any discussion of higher education costs, we do not include private costs in the final comparison of social costs and benefits. Earnings are a private benefit and they are not included in our definition of the “social benefits of education.” Therefore, private costs should not be included on the opposite side of the ledger when comparing the total social benefits to the costs of a four-year degree or higher. The next section analyzes how the benefits stack up against the social costs of providing the typical Kentuckian with a four-year undergraduate degree.
As shown in Table 1, compared to a high school diploma only, a college education or higher will yield substantial expected social benefits over the lifetime of a typical Kentucky man and woman. The estimated total present value of expected lifetime benefits associated with increasing a man’s education level from a high school diploma to a bachelor’s degree or higher is at least $126,000. For a woman the present value of this educational increase is at least $97,000. The average cost to the Commonwealth of providing a four-year undergraduate degree to either a man or a woman is approximately $24,626. Comparing these totals with the social costs of this education indicates that Kentucky stands to gain in many areas from investments in higher education.
The traditional decision rule for a cost-benefit analysis is to proceed with the project if the benefits outweigh the costs and those benefits are greater than those of alternative projects. If this were the only project before Kentucky, then these numbers would suggest that the project go forward. However, this is not a traditional cost-benefit analysis and this is not the only item on the state’s list of possible projects. Even though this is not an exhaustive analysis of all the benefits a quality postsecondary education system has to offer and we don’t have the benefits of alternative investments with which to compare our results, these numbers indicate that expenditures on higher education are worthwhile public investments.
At first glance some of these benefits may appear small. However, these estimates are narrowly focused to represent the expected benefits accruing over the lifetime of an individual with at least a bachelor’s degree or higher minus those expected benefits accruing over the lifetime of a high school graduate. Although we focus on the move from high school graduate to a graduate of a four-year degree-granting institution or higher, it is important to note that for the criminal justice system and welfare and food stamp reliance, greater savings are found with an increase from a high school dropout to a high school graduate. This helps to highlight the importance of investments in all levels of education. In addition, the welfare benefits presented here are calculated for only five years, due to the eligibility time constraints that were a part of recent welfare reforms. Even in the face of these limitations, society still enjoys savings attributable to lower demand for these programs associated with higher education.
Volunteerism alone accounts for up to $10,457 in increased societal benefits as we move the typical Kentucky man from a high school graduate to a graduate of a four-year degree-granting institution or higher. These data do not provide amounts of charitable contributions and no proxies were used to value community group participation or leadership—all of which increase as education levels rise.
Other educational benefits not shown here include those related to lower smoking rates, increased frequency of reading to children, increased access to technology, higher entrepreneurial activity and increases in voter registration. Health care expenditures attributable to smoking in Kentucky have been estimated to be as high as $1 billion annually. In aggregate, the reduction in the likelihood of smoking associated with a college education could conceivably save Kentucky millions of dollars in health care expenditures over the long run.
In addition, the final estimate of total benefits reveals a considerable gender discrepancy. The source of much of this gap is the difference in expected tax revenue received from men and women. These are income taxes which are tied to differences in earnings between men and women. While many studies have considered the gender wage gap, its sources and magnitude, many have identified the length of time spent in the labor force as a primary factor of this discrepancy. Women are less likely to work during all of their working-age years, often taking time from the labor force for child rearing, thereby lowering their expected lifetime earnings compared with their male counterparts.
The remaining gender differences in our calculations are tied to the higher likelihood that women will rely on public financial support while men are much more likely to be a participant of the criminal justice system. Thus, the difference in values shown here is a product of many sources used in the calculation of total expected benefits.
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Back to Social Benefits of Going to College
While we estimated the benefits associated with attaining a two-year degree in the previous section, they are excluded from the cost-benefit analysis, therefore so are the associated costs of that level of education. Return to text.
Instructional costs include only those funds expended for the payments of wages and salaries and daily plant and equipment maintenance and operation. Public funds used to pay for organized research and public service were excluded from the calculation of instructional costs per FTE. This separation of the types of costs incurred by a university or college was necessitated by the differentiation in colleges by function—research or instruction. As a means to remaining current in their field and thus improving their ability to teach in that field, faculty engage in basic research. This research does sometimes overlap with organized research. Therefore, some of the money spent separately for organized research directly benefits the student. The result is a possible underestimate here of the true costs of instruction, since the proportion of money spent on organized research that accrue directly to the student are difficult if not impossible to calculate. For more information on the treatment of the costs of higher education see Howard Bowen, The Costs of Higher Education: How Much Do Colleges and Universities Spend Per Student and How Much Should They Spend? (Carnegie Foundation for the Advancement of Teaching and San Francisco, CA: Jossey-Bass Publishers, 1980). Return to text.
There are several methods for calculating full-time equivalency (FTE); see the Glossary for further discussion of these methods. The one used here was developed by Integrated Postsecondary Education Data System IPEDS and calculates FTE as all full-time students plus one third of part-time students. Return to text.
All cost and student enrollment data were supplied courtesy of the Council on Postsecondary Education. Return to text.
This amount is slightly less than four times the yearly expenditure, to account for the time value of money. Most people prefer to have or spend money in the present rather than some time in the future, and present value calculations account for this fact. See glossary for full definition of present value calculations. Return to text.
Average tuition and fees is a weighted average of resident and nonresident tuition based on FTE enrollment. Return to text.
This may seem hefty to some, but upon comparison with other states, going to college in Kentucky is a reasonable expense. According to a recent evaluation of higher education in the states, Kentucky scored a "B" in affordability. For more information on this interstate comparison of higher education see: National Center for Public Policy and Higher Education, Measuring Up 2000: A State-by-State Report Card for Higher Education (Los Angeles, CA: Author, 2000). Return to text.
Although enrollment among nontraditional students who work full time in some cases has increased in recent years, theoretically a student pursues higher education on a full-time basis. Return to text.
Average wages were estimated using data from the Current Population Survey for March 2000. These are the mean wages of Kentucky men and women, ages 18 and older, with a high school diploma or less. These summary measures do not account for years of experience, type of profession, or other factors influencing the wage rate. Therefore, these may overestimate the actual wage an 18- to 24-year-old may earn if not attending college, since that student would not have the years of experience that usually contribute to a rise in earnings.
They also do not take into account the possibility that a student may work part-time throughout the year or full-time during months not spent attending school. These estimates represent year-round wages even though most students do not attend school the entire year. If the two to three months not spent in school are actually spent at work, the wages earned in this employment could partially offset the foregone earnings for an entire year. In addition, a student could also work part-time throughout the year, further offsetting these full-time, year-round estimates of foregone earnings. Return to text.
