NY Fed Data: The Value of College

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NY Fed Data: The Value of College

Economists at the New York Fed came out today with a novel Big Data analysis on US student loan default rates. This is a critical issue for the US economy, with student indebtedness up 170% over the last decade and 28% default rates (a record level) for those who graduated in 2010/2011. Defaulting on student loans hurts credit scores and, by extension, the ability for the millennial generation to access consumer credit such as mortgages, car loans and credit cards.

Since student loan default rates are one indicator of an individual’s post-graduate earnings power, the study is also a back door into understanding what types of education and degrees have the best personal return on investment.

Three surprising findings on that score:

#1: Community college 2-year degrees are not much more effective at increasing personal earnings power than the much-criticized degrees from private, for-profit 4-year programs. The Fed notes that students who attend public community college may come from more economically challenged households, so there could be a negative selection bias here.

Still, the data shows that 2-year degrees from these institutions don’t sufficiently lift students’ earnings power enough to lower default rates versus private for-profit schools. Ten years after graduation, both show default rates over 35%.

#2: It doesn’t matter much if a student graduates with a STEM vs. business/vocational degree if they attended a selective (rather than non-selective, as ranked by Barron’s) school. Where default rates climb is when the student majors in Arts/Humanities, although such a degree from a selective school still beats any major from a non-selective institution. As with the community college data, there may be some selection bias here as well. The overall trend, though, shows a wide gap in default rates between selective and non-selective schools.

If the school is non-selective, then a STEM or vocational degree is a much better choice in terms of higher earnings power and lower default rates. Default rates for Arts/Humanities majors from such schools are +25%. For STEM majors, they are 17%.

#3: In terms of higher education’s social promise of lifting the earnings power of economically less-advantaged students, the data shows that private, nonprofit schools deliver the best results. In fact, students from higher income households who attend a public university default at the same rate as a lower income student who gets a degree from a private non-profit school.

The upshot of the NY Fed’s work: the best economic payoff from higher education comes from attending a 4-year program at a selective school.

Source: http://libertystreeteconomics.newyorkfed.org/2017/11/who-is-more-likely-to-default-on-student-loans.html