Treasury Notes

 Higher Education, the President’s Initiatives, and the American Dream - in Three Charts

By: Wesley Yin

President Obama recently outlined a series of initiatives to make higher education more affordable to middle class Americans by driving better college performance, promoting innovation and completion in the marketplace, and ensuring that student loan debt is manageable. Economists have long known that education (or, as economists call it, “human capital”) benefits America as a whole. After all, a well-educated and highly-skilled work force is a key ingredient for long-term economic growth, especially in an increasingly competitive global economy. But there is also strong evidence that the economic benefits of college education to individual Americans and their families are large and growing. 

In the 21st Century, a college degree plays an increasingly pivotal role in helping families achieve the American Dream – getting a job, earning a decent living, and climbing the economic ladder from where their parents were. But at the same time, paying for college has become more difficult, especially for middle and working class families, whose college attendance continue to lag behind that of wealthier families. That is why it is important that a quality higher education remains within the reach of all Americans, regardless of income. 

Higher education brings many direct and indirect benefits, but two are of particular importance to the economic wellbeing of American families.

First, higher education leads to higher wages and more-secure employment. The median weekly earnings of a full-time, bachelor’s degree holder in 2012 were 63 percent higher than those of a high school graduate ($1,066 compared to $652). Median earnings were even greater for those with graduate or professional degrees.

At the same time, education lowers the chances of unemployment and acts as an insurance policy against economic downturns. The unemployment rate for workers with a bachelor’s degree was 4.5 percent in 2012, roughly half of the rate for people with only a high school diploma and well below the national average. 

chart1.jpgSecond, higher education significantly enhances economic mobility. Higher education not only pays now in absolute terms, but helps successive generations climb the economic ladder and become better off than their parents were. For example, among children born into the middle fifth of the income distribution (in 2011, this would have been roughly between $39,000 and $62,000), only about 12 percent without college degrees end up in the top fifth as adults. But when children from this group attain college degrees, over 30 percent end up in the top fifth, nearly a three-fold increase relative to those without a college degree. Likewise, obtaining a college education insulates children against falling down the economic ladder.  Less than 10 percent of children born into the middle fifth will end up in the bottom fifth, if they get a college degree.  Indeed, with a college degree, almost 80 percent of children end up as well as, or better off than, their parents.

chart2 education.jpg

However, whether a child attains higher education depends critically on family income.

The good news is that overall the fraction of children completing a college degree has increased markedly over the past 20 years across all income levels. Unfortunately, disparities by income remain, and in fact have grown. In 2010, only 12 percent of children (aged 26-30) whose parents were in the bottom fifth of the income distribution completed a bachelor’s degree.  By contrast, over half of the children born in the top fifth completed a college degree. And children at the lower end of the income distribution have not experienced as rapid an increase in college completion rates. 

This relationship between family income and college completion of children implies that income inequalities today carry on to the next generation. Increasing access to college education, regardless of family income, provides all Americans an opportunity to climb the economic ladder.

chart 3 education.jpgThe uneven increase in the rate of college attendance is partly due to the rising cost of higher education. Over the past several decades, funding of higher education has shifted from state assistance—in the forms of grants and subsidies—to increased tuition borne by students and their families. For example, 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.  Today, facing higher tuition and bearing a greater share of college costs, the average undergraduate student loan borrower graduates with over $26,000 in debt.  The rising financial burden has made going to college increasingly difficult for the children of working and middle class families, whose college attendance increasingly lags behind that of wealthier families. And at the same time, too many working and middle class students who enroll in college do not complete their degrees, further increasing the gap with their wealthier peers.

The President implemented several policies during his first term to increase access to a college education, including increasing the maximum Pell Grant award for working and middle class families by more than $900, creating the American Opportunity Tax Credit, and enacting effective student loan reforms eliminating subsidies to banks and redirecting those investments towards making college more affordable.  Building on these initiatives, the President last week outlined a new agenda aimed at driving better college performance, promoting innovation and completion in the marketplace, and ensuring that student loan debt is manageable. Combined, these efforts will make higher education more affordable and higher quality for middle and working class families, helping more students graduate with a degree that empowers them to achieve a better future.  And by fostering educational opportunities of middle and working class Americans, the President is ensuring a more skilled workforce and long-term economic growth for all Americans.

Wesley Yin is the Deputy Assistant Secretary for Microeconomic Policy at the U.S. Department of the Treasury.

Posted in:  Economic Policy
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