Is College An Investment Or Consumption?

As graduation approaches and students finalize their post-high school plans, families would do well to consider their financial paradigm about college. College pays off for many students, yet for others its expense and opportunity costs outweigh the benefits. There are many financial factors at play, including growing non-academic costs.

From plush Student Union centers and rock climbing walls to elaborate social outings and team sports (many of which are unprofitable, subsidized by student fees), the American college experience is flooded with non-educational costs that contribute heavily to rising tuition costs burdening middle-class families. College is becoming a temple of luxury rather than learning. But it’s worth taking a step back and looking at these amenities within a broader basket of goods in today’s modern college bundle.
Besides the excess costs, these ancillary consumption goods are sometimes correlated with poor academic outcomes. Take this recent study from Trinity College showing that students involved in Greek life are associated with lower GPAs. Sure, correlation doesn’t imply causation, but it’s tough to study when you’re up all night in the ER getting your stomach pumped for alcohol poisoning. Not an all-nighter to write home about.

Economist Bill Conerly sums it up well:

Some purchases are consumer goods, motivated by pleasure. Think movies, party dresses, vacations. Other purchases are investment goods. For a company, this includes factory equipment, trucks, or office buildings. For a family, an investment might be a washing machine (avoiding putting quarters in a laundromat), a basic car (to get to work in), or a house (to avoid paying rent). Borrowing money for an investment can be okay, but borrowing for a pure consumption good is not smart.

Now, what is college? A person majoring in engineering is buying an investment good. A person studying Russian literature is buying a consumption good. Borrowing for a pure consumption good does not make sense.

Conerly further argues that in many cases college education should be pursued once someone has learned a skill or occupation–providing a fallback for those following esoteric passions that can’t pay the bills.

Policy analysts Diana Furchtgott-Ross and Jared Meyer echo similar themes in their forthcoming book, Disinherited: How Washington Is Betraying America’s Young, where they posit that today’s current federal loan system is vastly outdated and should be calibrated to meet market demand for the chosen major. Online education, flexible learning campuses, and private lenders can also offer alternatives to government, on-campus educational monopolies.

Beth Akers from Brookings points to research from the National Bureau of Economic Research showing that college students like the perks, which incentivizes administrators to increase them, even if in the long run this leaves students heavily indebted. Akers offers a sensible solution to curtail the perverse consumption incentive created by government lending, which is agnostic when colleges pile on the perks.

While we don’t want to restrict a student from purchasing a ‘Cadillac’ college degree, we certainly don’t want the government to subsidize it. The simplest way to eliminate this bad incentive is to revise aid award formulas to ignore cost of attendance. Instead, aid awards could be based on average cost within the relevant set of comparable institutions (i.e. community college, four-year, etc.).

As students and families labor under nearly $1.2 trillion in student loan debt, we need to rethink the way we peddle the experience. We need to look at this with clear-eyed analysis of college’s true costs and benefits. That means taking a critical eye to the non-academic expenses adding to sky-high tuition hikes well above inflation and family incomes.