Education: investment or a waste of time and money?

Two recent articles illustrate the issue surrounding post secondary education. One article from the Financial Post tells the story of the burden of student loans. The second, from the National Post discusses the difficulties that graduates face in finding suitable employment.

Education can be modeled as an investment in human capital which provides both personal and social returns. The social return to education is so high that governments typically provide 100% subsidies for K-12. As with physical capital, human capital is affected by the law of diminishing returns. As the return to society decreases, so too does society’s willingness to pay. Post secondary students are expected to pay some of the cost of their education.

Governments determine the level of post secondary education based on the perceived or estimated social benefits. Once funding, and thus tuition rates are set, is up to the prospective student to determine how much education to buy. This is where investment decision theory takes over.

A firm will purchase a capital asset if the net present value of the asset is positive. This depends on the cost of the asset, the projected net revenue stream and the interest rate. An individual should invest in human capital using the same criteria. An education can increase future revenue and has both explicit and implicit costs.

One of the arguments in the article concerns the unemployment of recent university graduates. Unemployment can be result of a decline in economic activity which affects all education levels. However, as it points out, unemployment amongst university graduates is generally lower than amongst those without a degree.

There’s one other issue of note, and that is the topic of net worth. Suppose that John goes to work right after high school, saves his money and uses it for a down payment on an apartment that he rents out. He borrows an additional $60,000 and gets $1000 per month rental income. Mary, meanwhile, goes $60,000 into debt to fund her education and earns $2000 more per month than John. Who has a higher net worth, John or Mary? The account says John, the economist says Mary, but notes that Mary’s asset, her education, is terribly illiquid. Mary has a higher future income stream.

Students deciding to acquire an education must treat it as an investment decision. It is not up to business to be “more open-minded about hiring liberal arts graduates”, it is up to students to invest in something that will earn them a return.

Addendum: Here is a recent study from PayScale about median incomes from different college majors. We would like to point out the economics ranks 10th behind physics, applied mathematics and seven different engineering degrees. Come over to the Dark Side!

Sources:

Student debt bankrupting a generation, Mary Teresa Bitti, Financial Post, Jun 4, 2011, Accessed Jun 22, 2011

Is joblessness ‘new normal’ for grads, Kathryn Blaze Carlson, National Post, Jun 11, 2011, Accessed Jun 22, 2011

Michael S. Leonard
Kwantlen Polytechnic University
Surrey, BC

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