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Who wants to be a millionaire? Those willing to pay for a college degree

By John Garen

Most people don't know that they would make a list of U.S. millionaires.

Add up the earnings you have made or will make during your lifetime and convert it to 2008 dollars. A million-plus amount likely will appear, especially if you have a college degree. Yes, college graduates usually do quite well for themselves.

However, if college is such a great investment, why do Kentuckians need state government to subsidize tuition? We don't, nor should we expect it.

Since I’m partial to the University of Kentucky, I’ll use its budget for the 2006-07 fiscal year as a guide for discussion. (More information is available from the “UK Fact Book” at http://www.uky.edu/OPIE/FactBooklet0607.pdf.):

• Excluding the hospital, UK’s expenditures totaled approximately $1.2 billion. Not all that money went for instructional purposes because of UK’s large service function and other obligations, making comparisons to purely teaching institutions difficult.

• Money from state government totaled $318 million, some 26 percent. While this doesn’t represent a majority, state support remains quite important – more than even tuition revenue.

• UK’s total tuition revenue, based on approximately $6,500 per year for undergraduates, totaled $221 million – 18 percent of the total budget.

Remaining money comes from grants, contracts and donations. But clearly, students and their families directly pay a small share.

Yet college typically represents a great personal investment for most students. According to the U.S. Census Bureau, average annual earnings from age 18 to 64 for a high-school graduate total $1.7 million.¹ For college grads, it’s $2.8 million.

A college degree also looks pretty good when I compute the present discounted value of the high school and college earnings streams. The difference, depending on the interest rate I choose, is between $250,000 and $500,000.

Even at private-college tuition rates of $20,000 per year, acquiring a degree in four years for $80,000 in order to get from $250,000 and $500,000 later still sounds pretty good.

Faced with this opportunity, people don’t have to be told to invest in college even without tuition subsidized by the state. And most families of college students have the wherewithal to arrange finances to allow payment for substantially steeper tuition than UK and many other state universities charge.

For those who cannot, options exist, including direct financial aid for really low-income families or student loans. Leaving college with even tens of thousands of dollars of debt is still a good deal if, during the course of a lifetime, it enables you to earn a half-million dollars or more.

Some would argue the advantages of keeping tuition low to ensure college remains affordable for everyone. But state-subsidized tuition translates into direct financial aid for everyone, regardless of need.

Many of the state’s poorer residents won’t make it to college. But their payroll, income and sales taxes – and lottery tickets – subsidize tuition for higher-income families. That points to a real problem on my moral compass.

Instead, why not charge higher tuition to most students and focus financial aid on the truly needy?

Expecting beneficiaries of goods or services to pay for them is not a crazy idea. We do this all the time in a free-market economy. You pay for the goods and services that you use.

We readily borrow hundreds of thousands of dollars to buy a house because it typically represents a good investment. The same applies for borrowing to get a college degree.

Setting tuition rates to better reflect the cost of higher education comes with other benefits and brings to mind the adage: “He who pays the piper calls the tune.”

When colleges become dependent on government money, they fall prey to whatever political fad-of-the-session comes out of Frankfort. Charging higher tuition and moving the revenue base away from state support gives colleges more reason to pay less attention to Frankfort, and more to students and families.

Administrative time, energy and resources spent schmoozing in Frankfort could go to improvements for students, faculty and staff. And universities could detach themselves from varying, and often unreliable, support from state government.

We often hear that college provides social benefits to others beyond those who earn the degree, implying merit in state support. That’s true, but these societal gains likely pale in comparison to the individual benefits and don’t justify the preponderance of tax support for colleges.

So, you might justify some level of state support. But it’s appropriate that the main source of money come from the primary beneficiaries – college graduates themselves.

– John Garen, Ph.D., is chair of the Department of Economics and is Gatton Endowed Professor of Economics at the University of Kentucky. He can be reached at jgaren@uky.edu

¹The U.S. Census Bureau 2006 Current Population Survey reports earnings by age in 2006 for individuals of differing levels of education. This allows for an estimate of a 2008 graduate’s lifetime earnings (Logon to http://pubdb3.census.gov/macro/032007/perinc/new04_001.htm.).

The Bluegrass Institute is an independent research and educational institution offering free-market solutions to Kentucky's most pressing problems.

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