Investing in college doesn't always pay

Among the usual flood of unsolicited PR pitches last week was a simple e-mail that promised information on the "states most affected by student debt."

After following up — on the hunch that Minnesota must be one of them — it turned out that Minnesota seniors were fourth among the states in how much debt they carried with them leaving college, on average about $32,000. And more than two-thirds of graduates had borrowed money.

A producer of study materials called OneClass prepared this analysis last year, with the apparent agenda of reinforcing just how costly it now is to go to college. Yet what something costs is always the wrong thing to worry about. That's true even if it's necessary to borrow money to pay for it.

The thing that matters is whether you got value out of what you paid for.

Put into business terms, it's whether that big investment in a university degree generates enough of a return. And unfortunately, the conventional wisdom that yeah, of course it does, may not be nearly as wise anymore.

That's the conclusion of a great paper from last year by the Federal Reserve Bank of St. Louis. Authors William R. Emmons, Ana H. Kent and Lowell R. Ricketts gave away the suspense of their conclusions with the subtitle, "The New Calculus of Falling Returns."

The authors did acknowledge what we have long understood, that there are benefits to a college education besides making more money. And in some ways, the financial benefits are still there.

Their findings, based on Federal Reserve surveys of household finances, show that the income premium for college graduates over people without a degree has been pretty steady at about 100%, when looking at the data for everyone.

But the measure they seem to like better is the so-called "wealth premium," a measure of whether households headed by a college graduate accumulate more savings and other assets.

Household wealth or net worth is what somebody owns minus what they owe, and by 2016 the median household wealth of postgraduate-degreed families was about eight times as large as that of families headed by somebody without a degree. Part of the explanation is that the median net worth of families headed by people without a degree went backward between 1989 and 2016.

So far it sounds like a great case still exists for investing in higher education. Yet this case fell apart once the study authors broke their numbers apart, including by sorting the outcomes by simply how old people are.

White families headed by someone with a college degree born in the 1930s owned about 250% more wealth than families headed by somebody without a degree about the same age. But for white heads of households born in the 1980s, that wealth premium for a bachelor's degree graduate had sunk to only 40% more wealth. The thing is, whites born that decade were the only racial or ethnic group that got any wealth advantage for a college degree at all.

People looking for an extra edge by getting a graduate or professional degree got an even more disappointing outcome. For white families headed by somebody born in the 1980s with a postgraduate degree, the expected wealth premium has slipped to more or less zero.

There hasn't been any meaningful family wealth advantage for black people with postgraduate degrees going back as far as people born in the 1960s.

In a way this outcome seemed puzzling. If younger people who finished college or professional school still earned higher incomes, why couldn't they get ahead? A better understanding requires further research, the authors wrote, but one of the plausible explanations they offered is simply luck.

That is, some people entered adulthood at a time when they got to acquire assets like houses or shares of mutual funds really cheap. The normal ups and downs in asset values seemed to work out really well for the three oldest age groups that they studied.

Another explanation could be the consequences of what they called "financial liberalization," meaning the explosion in financial services beginning in the 1980s. Consumer credit surged, creating a lot more ways for consumers to get impaled on consumer debt.

They didn't quite say this, but the older generations may not have been any wiser. They got to be young adults with growing households back when it simply wasn't possible to get a handful of credit cards and run up $25,000 in high-interest debt.

Their last explanation seemed to be the most convincing, and that's just the rising cost of college.

It "checks all the boxes as a plausible explanation for our findings," they wrote. "It directly affects wealth, not income. It is a long-running story, and it is unrelated to changes in the demographics of college graduates for which we could control."

Another way to say this is that the return on investment in a college education, or ROI, had slipped. And what had changed wasn't the "R" of ROI, the return, but the "I." Adjusted for inflation, the "I" has only gone up.

In the last 20 years, the inflation-adjusted average "net paid" costs at a four-year public university, meaning the tuition and fees after financial-aid grants and tax breaks, has more than doubled.

Imagine a business owner who once could invest $100,000 in a new processing line to generate $25,000 a year before taxes, a capital investment with a healthy 25% return. Then a few years later when adding another unit, the capital costs had jumped to $200,000, while still only generating $25,000.

The pretax rate of return just got cut in half. If that turned into a trend, it soon wouldn't make much sense to go ahead with any investments like that.

Given how returns have slipped even as the total amount financed by debt marched steadily up to $1.5 trillion, you can see how it is possible for serious candidates for president to suggest wiping out all those loans.