| September 6, 2011

What to Expect from Enrolling in College

Oklahomans have many options to choose from when selecting a college. Information—specifically, information concerning the value added from attending one college versus another—is essential when shopping around for colleges.

One important piece of information is the expected college wage premium for Oklahoma’s several public colleges and universities, one that takes into account differences in the lifetime earnings of alumni of the state’s various colleges as well as the schools’ costs and graduation rates. As we document below, not all of Oklahoma’s public universities are created equal. Students’ outcomes vary dramatically between universities, a fact that potential students would be wise to consider when making their college decisions.

While there may be a variety of reasons for choosing to attend college, increasing one’s future earnings is among the most important and typical factors. College graduates earn a well-documented wage premium over their lesser-educated counterparts. According to the U.S. Bureau of Labor Statistics, the typical bachelor’s degree holder earns considerably more, about 165 percent of what their peers with just a high-school diploma earn.

Theory suggests that the wage premium exists because college teaches students new skills that make them more productive workers. Holding a college degree is also likely a favorable signal that indicates to employers that one will be a good worker who deserves a higher salary. This wage premium is often cited as the top reason that enrolling in college is a good investment.

Yet the wage-premium discussion often fails to account for the uncertain nature of actually graduating from college. Nearly 40 percent of all students nationwide who begin college never earn a degree. The figures are worse for students of most Oklahoma colleges. Therefore, for potential students, the future wage premium is a probabilistic occurrence. Thus, it makes more sense to convert the wage premium into an expected value, a common mode of analysis in economics. Simplified, expected-value figures are derived by multiplying the probability of an event by its payoff, a means to account for its unsure nature.

This method can be applied to the college wage premium to gain a more accurate view of the benefits students can expect from enrolling in college. To obtain the expected wage premium for the alumni of each of Oklahoma’s public colleges and universities, we used the following formula:

Expected college wage premium equals
(Lifetime earnings of college graduates
minus Cost of college
minus Lifetime earnings of high school graduates)
multiplied by 6-year graduation rate

A company called PayScale collects self-reported wages for alumni at various stages in their careers. From these wages we calculate a median lifetime earnings figure for alumni from each of Oklahoma’s public schools. Next, to earn a college degree, alumni incur the college costs of four years of tuition and fees (at least) and the opportunity cost of lost wages while attending college rather than working full-time. After subtracting out these college costs, we then utilize U.S. Census Bureau data to subtract the average lifetime earnings of workers who possess only high-school diplomas. Now, having derived a college wage premium estimate, we multiply by the institution’s six-year graduation rate to obtain an estimate of the expected college wage premium for 13 of Oklahoma’s public colleges and universities.

Expected College Wage Premiums at Oklahoma 4-year Public Colleges

Our results are displayed in Figure 1. The average expected premium for all 13 institutions is $213,575. However, it is immediately evident that these figures vary immensely between the schools. The flagship universities—the University of Oklahoma and Oklahoma State University—have expected lifetime premiums of $848,457 and $727,882 respectively. Southwestern Oklahoma State University and the University of Central Oklahoma are also above the state average. Yet the majority of institutions have very low expected wage premiums, highlighted by Rogers State University, where students can expect an average return of less than $16,000 over their lifetimes.

These data seriously question the ability of many of the second- and third-tier institutions to educate and prepare students for future employment. Mediocre future earning potentials, coupled with extremely low chances of actually graduating at some schools, reduce the expected financial benefits of attending to levels at which many students, especially those on the margin, may be better off not attending at all.

We are the first to acknowledge that these estimates are indeed estimates, and urge that they should be interpreted with caution. Our estimates are constrained by various assumptions and data-quality issues. First, our estimates do not consider student demographic factors, academic offerings, and, among other concerns, institutional selectivity. Our figures are estimates of what the typical student attending these institutions can expect to earn. Controlling for differences in such factors goes beyond the scope of this short article. Second, our lifetime earnings estimates for alumni are based on survey data reported by PayScale. Although this company is highly respected and its data widely used, the data quality is not perfect. However, to our knowledge, this is the best institution-by-institution data available to the public. Next, the six-year graduation rate figures used in this exercise underestimate institutions’ actual six-year graduation rates because they ignore part-time students and penalize institutions when students transfer out. These omissions bias our estimates downward.

On the flip side, this exercise assumes that the entire college wage premium is attributable to obtaining a college degree. Clearly this is not the case, since students who are successful in college almost certainly have innate attributes not gained from college that explain much of their higher earning potential. Thus, this assumption biases our results in the positive direction, likely exaggerating the actual expected wage premium.

We suspect that when all these issues are considered, the estimates overstate each school’s true expected wage premium, providing further evidence that students should be cautious and understand that college may not be as sure an investment as many would have them believe.

Matthew Denhart is administrative director of the Center for College Affordability and Productivity (CCAP) in Washington, D.C. He has authored or co-authored numerous studies on higher education for CCAP, as well as for organizations such as the Heritage Foundation, the Texas Public Policy Foundation, and OCPA. His writings have appeared in numerous publications, including The Wall Street Journal and The Oklahoman.

Christopher Matgouranis is a student at Ohio State University’s Michael E. Moritz College of Law. Previously he was chief research assistant at CCAP.

Denhart and Matgouranis have both played a leading role in the development of CCAP’s annual ranking of “America’s Best Colleges,” published annually by Forbes magazine.

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