Economic Impact of Higher Education

Document Sample
Economic Impact of Higher Education Powered By Docstoc
					    Economic Impact of Higher Education –
      Understanding the Value of Higher
                 Education

               November 13-15, 2005
             copies of this presentation can be found at
               www.business.duq.edu/faculty/davies




1
                                           Growth in Tuition Over Time



                                           College tuition has increased 7% annually while
                                           consumer inflation has averaged only 4.5% annually.




    Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
2
             Cost of Education Relative to Household Income




                 College tuition has grown from 20% of household
                 income in 1976 to over 45% in 2003.




    Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
3
            Sources of Benefits to Higher Education



    Benefits of a college education vs. a high school education

    • Difference in entry-level wages.

    • Difference in the growth rates of wages over the
      course of a career.

    • Difference in the likelihoods of employment.



4
    Difference in Entry-Level Wages


           Starting salaries 42% higher for degreed workers




                                    Source: Statistical Abstract of the United States, 2004-2005
5
    Difference in Growth Rate of Wages


          Salaries grow 1.1%-points faster for degreed workers




                                       Source: Statistical Abstract of the United States, 2004-2005
6
    Difference in Likelihoods of Employment

    Likelihood of employment 15%-points greater for degreed workers




                                            Source: Statistical Abstract of the United States, 2004-2005
7
             Expected Earnings




    (Earnings) (Probability of Employment) = Expected Earnings




8
                     Expected Earnings


    Annual Earnings (18-65 year olds)
    The average working college graduate earns 113%
    more than the average working high school graduate.


    Expected Annual Earnings (18-65 year olds)
    The average college graduate earns 167% more than
    the average high school graduate.


9
                                 Compensation-Expense Comparison

                             High school graduate enters workforce at
                             age 18 and begins to accumulate earnings.




                                                                                          $184,000 difference by age 21



                            College student starts college education at
                            age 18 and begins to accumulate debt.




     Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
10
                                 Compensation-Expense Comparison




                                                                                                  In 1977, difference was $45,000




     Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
11
                                 Compensation-Expense Comparison

                                After finishing college, the college student’s earnings begin to
                                outpace the high school graduate’s earnings.



                                        Breakeven at age 28


                                                                                                 Cumulative expected difference
                                                                                                          was $375,000 in 1977




     Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
12
                                 Compensation-Expense Comparison



                                 Breakeven at age 25
                                                                                          Cumulative expected difference
                                                                                                   is $2.3 million in 2005




     Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
13
          Evaluating the Benefit of Higher Education



     Three ways to evaluate the benefit of an investment

     • Breakeven Point

     • Internal Rate of Return

     • Net Present Value



14
          Evaluating the Benefit of a College Education
     Breakeven Point
     How many years will it take to recoup investment?

     Example
     Invest $10,000 and receive $1,000 each year for 20 years.
     Breakeven = 10 years

     1977
     Cost of college plus lost compensation         $63,000 (in 1977$)
     Benefit of college                             $375,000 (in 1977$)
     Breakeven:                                     11.4 years

     2002
     Cost of college plus lost compensation         $184,000 (in 2002$)
     Benefit of college                             $2.3 million (in 2002$)
     Breakeven:                                     9.1 years
15
                   Evaluating the Benefit of a College Education


                                                                   The breakeven period on a college education has
                                                                   fallen from 11 years in 1977 to 9 years today.




     Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
16
           Evaluating the Benefit of a College Education
     Internal Rate of Return
     The benefit represents what rate of return on the investment?

     Example
     Invest $10,000 and receive $10,800 back one year in the future.
     IRR = 8%

     1977
     Cost of college plus lost compensation         $63,000 (in 1977$)
     Benefit of college                             $375,000 (in 1977$)
     Real IRR (rate of return after inflation):     13.9%

     2002
     Cost of college plus lost compensation         $184,000 (in 2002$)
     Benefit of college                             $2.3 million (in 2002$)
     Real IRR (rate of return after inflation):     17.2%
17
                   Evaluating the Benefit of a College Education




                                             The real rate of return on a college education has risen from
                                             less than 14% in 1977 to over 17% today.




     Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
18
                   Evaluating the Benefit of a College Education




     Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002


19
          Evaluating the Benefit of a College Education
     Net Present Value
     The net future benefit is equivalent to what lump-sum amount today?

     Example
     Giving up $10,000 today and receiving $1,000 each year for 20 years
     is the same as receiving $2,462 today (assuming 5% market interest).

     1977
     Cost of college plus lost compensation        $63,000 (in 1977$)
     Benefit of college                            $370,000 (in 1977$)
     Net Present Value:                            $163,000 (in 1977$)
                                                   $524,000 (in 2005$)
     2005
     Cost of college plus lost compensation        $220,000 (in 2005$)
     Benefit of college                            $2.4 million (in 2005$)
     Net Present Value:                            $1,035,000 (in 2005$)
20
                   Evaluating the Benefit of a College Education




                             The present value of a college education net of tuition has doubled over
                             the past 25 years.




     Source: Statistical Abstract of the United States, 1995-2002, Current Population Reports, Bureau of the Census, 1997, Annual Survey of Colleges, The College Board, 2002
21
               These Estimates are Conservative

     Assumed: Tuition is $19,700 per year (average for 4-year
              private institutions in 2002).
     Reality: More than 70% of students pay less than
              $10,000 per year, and 50% of students pay less
              than $6,000 per year.


     Assumed: No financial aid.
     Reality: Grant aid averaged $3,600 per student in 2002.


     Assumed: No tuition discounting.
     Reality: Average 4-Year private institution discounted
              39% in 2002.
22
     Implications of Tuition as an Expense vs. Investment

       Comparing tuition to household income à reduce the cost
       of loans regardless of the future income generated by the
       loans.

       Reducing loan interest rates causes a reduction in liquidity.


       Reduction in liquidity prevents students from leveraging
       future income gains à students forced to find current
       income sources to fund educations.


       Misperception of tuition as an expense, rather than
       investment, is reinforced.
23
                         Perceived Burden of Tuition Debt


     High Pain



                                     20% of graduates report at least a “high” debt
     Low Pain Moderate




                                     burden when their loan payments rise above
                                     12% of their gross incomes.

                              50% of graduates report at least a “moderate” debt
                              burden when their loan payments rise above 8% of
                              their gross incomes.




                                Source: College on Credit: How Borrowers Perceive their Education Debt , Nellie Mae Corporation, 2003.
24
     100% of Tuition & Related Fees Financed via Debt


          High Pain
          Low Pain Moderate




                              If loan terms were extended to 20 years, banks could
                              charge almost 6% interest on student loans before students
                              started to feel “moderate” pain from student loan debt.




25
     100% of Tuition & Related Fees Financed via Debt


          High Pain
          Low Pain Moderate




                              If loan terms remained at 10 years, but loan payments were made in
                              pre-tax dollars, banks could charge over 8% interest on student loans
                              before students started to feel “high” pain from student loan debt.




26
     100% of Tuition & Related Fees Financed via Debt

                              If loan terms were extended to 20 years and loan payments were

          High Pain
                              made in pre-tax dollars, banks could charge more than 9% interest
                              on student loans before students started to feel “moderate” pain
                              from student loan debt.
          Low Pain Moderate




27
                  Thoughts Outside the Box




 Conclusion:

 Reducing loan interest rates solves a problem that doesn’t exist,
 and may introduce a problem that wouldn’t have existed
 otherwise.




28
                    Thoughts Outside the Box
 Government can encourage markets to provide more liquidity

 Ø Allow market rates to prevail à e.g. 12% interest rate on
  college loans

 Ø Employers deduct student loan payments from paychecks
     § No additional cost: use existing withholding infrastructure
     § Reduces loan default costs

 Ø Loan payments capped at 15% (?) of gross income
     § Life of loan can vary so that loan is paid in full given cap
     § Automatically provides relief during unemployment
29
                   Thoughts Outside the Box
 Government can encourage markets to provide more liquidity

 Ø Tuition loan payments in pre-tax dollars
     § Current tax treatment reinforces “tuition as expense”

 Ø Possibly revenue neutral; maybe revenue positive
     § No government cost of loan guarantees
     § No government cost of interest rate subsidies
     § No government cost of grants
     § College graduates generate $700,000 more in wage taxes
       net of increased Social Security retirement benefits than
       high school graduates
30
          Expected Wage Tax Revenue




     A college graduate generates $740,000 more in wage
     tax receipts (2003$) than a high school graduate.

31
                 Expected Wage Tax Revenue




     A college graduate generates $700,000 more in net
     wage tax receipts (2003$) than a high school graduate,
     after accounting for increased Social Security benefits.
32
                  Interesting Market Evolution
 Students charged different rates on the basis of secondary
 school performance, university performance, selected major, and
 demonstrated ability.

 Ø Students pursuing degrees that lead to better paying jobs will
   be charged lower interest rates
     §   Incentive to students to pursue more valuable careers
         impacts at time of enrollment rather than post-graduation
         (when it is too late to affect behavior)

 Ø Interest rates become a market metric of the quality of
   secondary-school preparation and university education
     §   Incentive to universities to make educations relevant
         impacts at time of enrollment rather than generations later
33
                      Education as an Export




     Higher education is a significant U.S. export

     US exports of higher education increased from $3.5 billion in
     1986 to $12.8 billion in 2002.

     à Annual growth rate of 8.4%.




34
                      Education as an Export




     Foreign students studying in the U.S.
     contributed $13 billion to the U.S. economy in
     2002. Education is the fourth largest source of
     net exports in the U.S.


             Source: International Trade Association, 2003, National Center for Policy Analysis, 2001, Bureau of Economic Analysis, 2003.
35
               Education as an Export


     Education is one of only six categories that has
     exhibited net export growth over the past fifteen years.




      Source: International Trade Association, 2003, National Center for Policy Analysis, 2001, Bureau of Economic Analysis, 2003.
36
                     Some Pending Legislation


     Pending legislation falls (roughly) into three groups:

     •   Legislation to control tuition or tuition growth.

     2. Legislation to provide tuition tax incentives.

     3. Legislation to provide tuition loan forgiveness.




37
     Unintended Consequences of Price/Growth Controls
     à Colleges quote a “sticker price” and then discount from
       that price on the basis of student need and academic
       strength.

     à Colleges use tuition discounting to transfer tuition costs
       from less needy to more needy students.

     Unintended consequence: Price/growth controls will
       prevent the transfer of tuition costs from less needy to
       more needy students.

     Unintended consequence: Price/growth controls will
       result in fewer needy students attending college.

38
     Unintended Consequences of Price/Growth Controls

     à Dollars foreign students spend in the U.S. on education
       and living are part of U.S. exports.


     Unintended consequence: Price/growth controls will slow
       U.S. education exports resulting in a worsening of the
       trade deficit.

     Unintended consequence: Price/growth controls will
       prevent the transfer of tuition costs from American to
       foreign students (via tuition discounting), benefiting
       foreign students at the expense of American students.

39
         Unintended Consequences of Tax Incentives



     à Needy students’ families pay relatively little income tax.

     à Wealthy students’ families pay no Social Security tax (at
       the margin).


     Unintended Consequence: Making tuition payments free
       of Federal/State taxes, but not Social Security tax,
       benefits families of wealthy students and has little effect
       on families of needy students.


40
        Unintended Consequences of Loan Forgiveness
     à Proposed legislation allows loan forgiveness for students
       entering select career fields: public service, teaching,
       early childhood education, nursing, child welfare,
       nutrition.

     Unintended Consequence: Encourages more students to
       enter these select fields. Wages in those fields will
       decline.

     Unintended Consequence: As wages decline in the
       select fields, the most talented workers will leave for less
       crowded fields resulting in a decline in the average
       quality of workers in the select fields.

41
     Economic Impact of Higher Education –
       Understanding the Value of Higher
                  Education

                November 13-15, 2005
              copies of this presentation can be found at
                www.business.duq.edu/faculty/davies




42

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:2
posted:10/12/2013
language:English
pages:42
wu yunyi wu yunyi
About wuyyok@163.com