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Treasury Notes

 The Economic Case for Higher Education

By: Jan Eberly and Carmel Martin
12/13/2012

As the semester draws to a close at schools and universities across the country and college applications are submitted, the Treasury Department has released a report that should be food for thought for students scrambling to complete their work and finish their exams. The new report, prepared in conjunction with the Education Department, shows that investing in education expands job opportunities, boosts America’s competitiveness, and supports the kind of income mobility that is fundamental to a growing economy.

While post-secondary education has become increasingly important over time, there have also been growing concerns about the accessibility and affordability of higher education. In particular, students and their families are bearing a greater share of college costs than a generation ago. In an effort to help counteract these trends, the Obama Administration has implemented several new policies to provide relief for students and their families, including increasing Pell grants, introducing the American Opportunity Tax Credit, keeping Stafford loan interest rates low, and expanding “income-based repayment.” This report confirms the critical importance of higher education, showing the personal economic benefits of attending college, and includes data and analysis on the broader role of a well-educated workforce, which is vital to our nation’s future economic growth.

American companies and businesses require a highly skilled workforce to meet the demands of today’s increasingly competitive global economy. This report explores the current state of higher education, with a high-level overview of the market and a more detailed discussion and analysis of the financial aid system. The report also outlines the important steps the President has already taken to make higher education more accessible and affordable. 

Key findings include:

Students are bearing a greater share of the college costs than a generation ago. At public four-year colleges and universities, tuition and fees as a percent of revenue has doubled since 1987, while the proportion funded by state and local governments has fallen by about one-third. Meanwhile, in-state tuition at public four-year colleges and universities has grown by two-thirds since 2000 after adjusting for inflation.​ 

People with more education typically earn more and have a lower likelihood of being unemployed. In 2011, the typical worker with just a bachelor’s degree earned about $1,000 a week, roughly two-thirds more than those with only a high school diploma.  The unemployment rate for workers with a bachelor’s degree was 4.9 percent, about half of the rate for people with only a high school diploma.

employmenteducation.jpg 

Source: Bureau of Labor Statistics (2012). Data are for individuals age 25 and over.  Earnings are for full-time wage and salary workers.​

Education significantly increases the ability of children to move up the economic ladder. For example, having a college degree means that children born into the middle three income quintiles are more than 75 percent more likely to advance to a higher income quintile as adults than those who do not get a college degree.

econladder.jpg  

Source: Brookings analysis of the Panel Study of Income Dynamics (Isaacs, Sawhill, & Haskins, 2011).​

Recognizing these trends, the Obama Administration has implemented several new policies to provide relief for students and their families The Administration’s actions include:

o   Raising Pell grants: The maximum Pell grant increased from $4,731 in 2008 to $5,550 in 2010.

o   Introducing the American Opportunity Tax Credit: This replaced the Hope Credit with a more generous credit amount (up to $2,500 compared to $1,800), is available for four years instead of two, and is available to a broader range of families due to its partial refundability and higher income limits.

o   Keeping Stafford loan interest rates low: The reduced 3.4 percent interest rate on subsidized Stafford loans was extended for another year this summer, rather than rising to 6.8 percent as scheduled under then-existing law.

o   Expanding “income-based repayment”: Starting in 2009, student borrowers participating in the Direct Loan program may qualify for the “income-based repayment” (IBR) plan, which caps monthly student loan payments at 15 percent of discretionary income. In 2010 legislation, IBR was made more generous starting in 2014, with a lower maximum on payments (10 percent instead of 15 percent) and forgiveness after 20 years (instead of 25 years).  And in Fall 2011, the Administration announced its new “Pay as You Earn” program that would provide similar benefits to new qualifying borrowers
who will be able to use the program by the end of 2012..

Read the full report and fact sheet here.

Jan Eberly is the Assistant Secretary for Economic Policy and Chief Economist at the U.S. Department of the Treasury and Carmel Martin is the Assistant Secretary for Planning, Evaluation and Policy Development at the U.S. Department of Education.

Posted in:  Economic Policy
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