In The Case Against Education, Bryan Caplan walks through detailed calculations on the expected selfish or private return to education for different types of students.
The selfish return depends on at least 4 things:
- the education premium — how much education is expected to raise your future income;
- tuition costs — including textbooks, supplies, etc;
- opportunity costs — what you would earn if you don’t study; and
- expected success rate — some students are more likely to drop out than others.
Caplan’s spreadsheets are available online. You can adjust them to better match your personal circumstances if you’re deciding whether to undertake any further education.
Different types of students
Sorting by different types of students is important because students have different success rates for various levels of education. As noted in my main summary, there’s a sheepskin effect where most of the financial gains when you actually get your qualification. So expected returns from education are lower once you account for those who end up dropping out.
Caplan works through four calculations for the following types of students:
- Excellent Students fit the profile of the typical master’s degree holder in terms of cognitive ability, character, background, etc. They are around the 82nd percentile in measured cognitive ability.
- Good Students fit the profile of the typical BA who didn’t go on to postgraduate studies. They are around the 73rd percentile in measured cognitive ability.
- Fair Students fit the profile of the typical high school graduate who doesn’t try college. They are around the 41st percentile in measured cognitive ability.
- Poor Students fit the profile of the typical high school dropout. They are around the 24th percentile in measured cognitive ability.
Different types of education
In Caplan’s book, he calculates the expected returns for three different types of education: High School, Bachelor’s Degrees, and Master’s Degrees. For the Bachelor’s degrees, he also looks at the college major.
Tuition costs vary significantly between public vs private schools. In the US, tuition at an in-state public college is surprisingly affordable. For your typical Good Student, the yearly out-of-pocket costs for tuition and supplies after accounting for financial aid is only $3,662. [This was based on a 2011 paper. The costs will be higher now due to inflation.]
Caplan’s main calculations assume that people attend public schools because the general consensus is that where you study is less important than what you study. Although Ivy League graduates are very successful, much of this is due to ability bias as those schools are highly selective. Private school is not usually worth it because of their much higher tuition costs, even if you’re an Excellent Student (unless you can get very generous financial aid).
Other factors
Some other factors that Caplan discusses include:
- Opportunity costs. Caplan assumes a 2.5% annual “experience premium” to account for how someone’s income can be expected to rise with job experience if they’re working instead of studying.
- Job satisfaction. After controlling for income, education doesn’t seem to increase job satisfaction. Some studies even suggest education can reduce job satisfaction, perhaps by raising expectations.
- How enjoyable education is. On average, students report being very bored, with higher boredom rates in high school than in college. People don’t enjoy work, either, but work seems to have a slight edge.
- Health benefits. Education seems to show health benefits even after correcting for income, intelligence, health knowledge and various other factors. But part of this may be reverse causation (people with poor health do worse in school).
- How long you will work. Caplan’s estimates assume students go on to work full-time from graduation to retirement. For female Poor Students, returns are much lower than what the above figures suggest because many stop working at some point (e.g. to raise children).
- Marital return. Graduates are more likely to marry other graduates, which leads to higher lifetime earnings. The effect seems particularly strong for women with one study finding over half of a woman’s financial gains from going to a higher quality college came through marriage. This might actually be the best reason to choose an expensive private school over a cheaper public one.
Caplan admits that the data is imperfect and there are various points where he’s had to make best guesses. Data is particularly weak for:
- Completion probabilities for different types of students;
- Subjective experiences of school vs work; and
- Master’s degrees.
You can also see his attempts to account for these factors on his website.
Results
Expected Annual Return from pursuing an extra year of education for different students
The table above shows the expected (selfish) Annual Return from pursuing the next year of education for different types of students.
Caplan also calculates Degree Returns in his book, being the expected return from pursuing the next degree on the horizon. The two key points to note about Degree returns are:
- All Degree Returns are equal to or higher than the Annual Returns because they spread the gains from the graduation year/sheepskin effect across the earlier years. For example, the Good Student’s Annual Return for the first year of college is 2.6% while their Degree Return is 4.9%.
- Degree Returns increase as students progress. For example, a Good Student’s Degree Return is 4.9% in their 1st year of college, 6.4% in their 2nd year, 9.7% in the 3rd year, and so on. This is because each year of education completed gets them closer to the next degree.
Conclusion
To summarise, Caplan finds that:
- High school is worth it for almost all students. The only students for whom high school may not be worth it are those who don’t plan to work full-time after graduation or those with slim chances of graduating.
- A bachelor’s degree is only a good deal for Excellent and Good Students. It probably won’t be worth it for most Fair Students, but it might be for those who choose a lucrative major or particularly enjoy college. Poor Students should not bother with college at all.
- Master’s degrees are at best an average deal for Excellent Students. They are bad deals for everyone else.
Click here to read my full summary of The Case Against Education