Educational Economics: The Return on Investment in Higher Education

The blunt truth about American higher education is that a college degree still pays better on average(about $80,000 a year) versus high school grads ($47,000). Yet more than half of recent bachelor's recipients are either underemployed one year after graduating, stuck in jobs that don't require the degree they earned. It's the paradox in plain sight: high wages still exist, yet the college promise feels shakier than ever.

The Unmoving Premium

For decades, the earnings premium (the extra income you get) from a college degree climbed steadily. Then, around 2000, something changed. The premium stopped growing even as tuition jumped roughly 40 percent from 2000 to 2023. Economists at the Minneapolis Fed point to a decisive change: firms started substituting non-degreed workers for many roles. College credentials weren't as essential as they used to be.

Graduates still earn about 68 percent more over a lifetime ($2.8 million versus $1.6 million). This reinforces conventional wisdom, but means obfuscate the truth. While earning premiums stagnated, wages for high school grads have, in recent times, been rising faster due to tight labor markets, increased minimum wage, and significant government stimulus.

Today, the average student carries $39,075 in federal student debt, while the median debt sits between $20,000 and $24,999. The NY Fed pegs the total cost of a four-year degree, including tuition, fees, and foregone earnings, at about $180,000 in 2024. The median return on investment sits at 12.5 percent, which beats the stock market, but about a quarter of grads see no positive return at all.

The Big Problem

Not all degrees are created equal. Engineering and computer science yield a ROI over 13 percent, with some programs yielding lifetime gains of half a million or more. Finance degrees yields a lifetime ROI of around 1,842 percent. These are not insignificant or slight differences, but life-changing.

On the other end, education majors show a negative ROI (-55.43 percent). Fine arts grads lose an average of $88,000 over their lifetimes. The FREOPP study flags the fact that 23 percent of bachelor's degree programs deliver negative ROI.

Here's the kicker: for students from low-income backgrounds who complete, the college wage premium has shrunk to half of what it was back in 1960. The researchers call this "regressivity." More of these students from the bottom income third are enrolling in community colleges or for-profit schools instead of high-value four-year institutions, and they're choosing majors that pay about four percentage points less each year than what wealthier peers pursued in earlier decades. In short, class matters before graduation even begins.

The Completion Crisis

Yet the challenge isn't just getting in-it's finishing. Only 61% graduate within six years. The annual drop-out rate is around 32.9%, with 30% in the first year. Public universities have about half of their students drop out, while graduation rates at for-profit schools hover at approximately 36%.

But more than half of dropouts, 51%, attribute financial difficulties as the primary reason. They leave with debt and no degree, the worst possible outcome. Those that do graduate, many take longer than four years-inflating costs and delaying earnings. The NY Fed notes ROI falls to 9.3% for five-year graduates and just over 7% for six-year graduates.

Racial gaps persist: 77% of Asian students graduate within six years, while the percentages for White, Hispanic, and Black students are 73%, 52%, and 45%, respectively. Women graduate at about 67% versus 60% for men. These trends suggest that college works better for some groups than others, though the reasons are still debated: whether it's preparation, resources, institutional support, or something else.

The Underemployment Trap

Despite this, many graduates cannot find jobs that make the investment worthwhile. A year after graduation, half of bachelor's degree holders were underemployed-as in, engaged in jobs that didn't require a four-year credential. A decade later, 45% remained underemployed. This is not a phase that will pass. The data reveal path dependence: 73% who start underemployed remain so a decade later; 79% who begin in college-level jobs remain there five years out. First jobs set trajectories that are hard to escape. Unpaid internships can help: they reduce the chances of underemployment by roughly 48.5 percent, even after controlling for all other factors. But access to those internships correlates with family income and institutional resources.

The system stratifies outcomes by class before students even graduate.

Recent unemployment data shows this concern: 9.7% of bachelor's degree holders ages 20-24 were unemployed in September 2024, up from 6.8% a year prior. Young college graduates are now spending more time unemployed than job hunters with only a high school diploma. The gap between their unemployment rates has narrowed to the smallest margin since records began.

The Alternative Pathways

Against this backdrop, trade schools present a compelling counter-narrative. Average completion time: six months to two years versus four years. Average debt load: $8,075 versus $31,960 for bachelor's degrees. Starting salaries for tech bootcamp graduates range from $50,000 to $90,000, while vocational graduates in healthcare or business administration earn $40,000 to $60,000.

Some trades match or exceed many bachelor's degree outcomes. Diagnostic medical sonographers earn a median $81,350 annually. Dental hygienists pull in $76,000 nationally, ranging up to $115,000 in Alaska. Electricians average $60,370 but can earn $79,000 in New York. These workers start earning years earlier and accumulate less debt.

The trade school market has grown more than 100% in the last five years. That's not coincidental. When 57% of college students believe higher education is no longer worth the cost, practical alternatives gain traction.

But trade careers come with their own limitations. Over a career span, bachelor's degree holders earn 70% more than high school graduates. Management roles—which often require degrees—offer substantially higher lifetime earnings. The wage gap between college-based careers and trades actually widens as workers age. What looks economically rational at 22 may feel constraining at 42.

The Substitution Effect

The fundamental question isn't whether college offers positive returns—for most graduates, it still does. The question is whether those returns justify the rising costs and risks.

The Minneapolis Fed researchers identified something crucial: the degree of substitutability between college-educated and high school-educated workers increased starting around 2000. Firms that once demanded degrees became more willing to hire non-graduates. Technology, which economists long believed favored skilled workers, may have reached a point where it reduces the demand for certain types of college-educated labor.

This shows up in the underemployment data. 40.5% of recent college graduates are underemployed, according to the NY Fed's latest figures—the highest level since 2020. Many work in "non-college" jobs that are skilled and reasonably paid but don't require the credential they spent years and tens of thousands of dollars obtaining.

The economic logic shifts when employers can easily substitute workers. If a marketing coordinator role once required a bachelor's degree but now accepts a high school graduate with portfolio experience and a bootcamp certificate, the value proposition changes. Not for every job, but for enough to matter.

What This Means

Three patterns converge: stagnating premiums, rising costs, and increased substitutability. Together they suggest college remains worthwhile for many but riskier than before.

The numbers still favor completion, especially in high-return majors. An engineering degree from a public university delivers extraordinary value. But a humanities degree from an expensive private school? The math gets murky fast. And the 32.9% who don't finish face the worst outcome: debt without credentials.

The regressivity finding particularly matters. College is supposed to be an engine of social mobility. But when lower-income students see their degree premium halve over six decades while wealthier students maintain theirs, something has broken. The gap isn't driven by ability—test score differences within the college-going population have been flat since 1965. It's institutional: community colleges versus flagships, humanities majors versus engineering, access to internships and networks.

This creates a sorting mechanism. Wealthy students can afford to major in fields they find intellectually stimulating, knowing family resources provide a cushion. Lower-income students face starker tradeoffs. The degree that once promised escape now carries the risk of compounding disadvantage through debt and underemployment.

Meanwhile, employers signal mixed messages. They say they want degrees, then hire bootcamp graduates. They screen resumes for credentials, then promote workers based on demonstrated ability. The mismatch leaves students navigating contradictory information with limited guidance.

The Real Calculation

The ROI question ultimately depends on specifics that most 18-year-olds can't fully evaluate: Which major? Which school? Which career path? How much debt? What's your family's financial situation? Can you secure internships? Will you finish in four years?

Get those right and college remains transformative. The median 12.5% return beats most investments. But the variance around that median has widened dramatically. About one-third of students are enrolled in programs that won't deliver a financial payoff.

The traditional advice—"just go to college"—no longer suffices. It needs qualification: Which college matters. What you study matters. Whether you finish matters. How you leverage internships and networks matters. The credential alone guarantees less than it used to.

For students who can navigate this complexity with information and resources, college still opens doors. For those who can't—who rely on limited information, choose poorly, accumulate debt, and struggle to complete—the promise erodes.

The piece of paper retains value. But its worth increasingly depends on what's written on it, where it came from, and what debt came with it. That's a more complicated calculation than the question that opened this piece suggested.

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