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College Choices and Success: Four Questions for an Economist

Wednesday, November 18, 2020

By Kristie Engemann, Public Affairs Staff

How have students been paying for rising college tuition? Will attending a higher-quality university, which tends to cost more, pay off in the long run?

Oksana Leukhina, a research officer and economist at the St. Louis Fed, discussed these topics during a Twitter Q&A on Nov. 10. One of her areas of study is the returns for students—and the economy—from studying at different types of colleges.

“If returns to college are high for most students, then policies that encourage college education would be helpful and would raise aggregate labor productivity,” Leukhina said. She has been delving into the topic with her co-author on recent papers, Lutz Hendricks, an associate professor of economics at University of North Carolina at Chapel Hill. The two also have been working on research on the topic with Tatyana Koreshkova, associate professor of economics at Concordia College in Montreal.

Leukhina’s responses to four questions on the topic are below. Questions and responses have been lightly edited for clarity and length.

Q: How much does college quality factor into a student’s likely success?

Leukhina: College quality is very important, but probably less so than what families might think. It seems to matter more for graduation outcomes rather than wages upon graduation.

Let me start by talking about how we distinguish between different types of universities [in the U.S.]. We treat community colleges separately, as the lowest tier, and then we split four-year colleges and universities into three tiers according to their average freshman SAT score. According to this classification, higher-type colleges host a more strictly selected group of students, and that is going to matter for peer effects. But they also provide higher quality instruction, better advising, better tutoring services, and, of course, they cost more.

Six-year B.A. attainment rates differ dramatically across these types of colleges—from about 10% for students that start in a two-year college to as much as 85% for students in the top-tier four-year college. An important part of that variation is explained by differences in student body rather than the effect of college itself. But there is still an important difference that remains, even after we focus on students with similar backgrounds.

So, it seems that higher-quality schools—whether through peer effects or a higher quality of advising and tutoring services for the less prepared students—do more effectively get you to that finish line.

Looking at earnings of students who manage to graduate, we see the effects of the type of schools to be much smaller. Average earnings will go up by at most 10% if you graduate from the middle-tier four-year school compared to the lowest-tier four-year school, and by at most another 10% if you graduate from the top tier. I consider these effects to be relatively small.

Q: What is the biggest mistake students often make during the college selection process and why?

Leukhina: I think the biggest mistake that students make is taking average statistics that are out there a bit too literally and not tailoring those projections for their own background.

Suppose that we compare [California-based] Harvey Mudd College students to UC [University of California]-Irvine students. Harvey Mudd students, nearly all of whom major in STEM [science, technology, engineering and math] fields, report earning about $86,000 shortly after graduation, while UC-Irvine students earn a third less.

Should a student who plans to study engineering and is admitted to both schools conclude that choosing UC-Irvine over Harvey Mudd would entail giving up a third of his or her post-graduation salary? The answer is no, because the higher average earnings of the Harvey Mudd students is partly explained by the fact that their students all major in the more lucrative STEM fields.

What the student should do is compare outcomes for a set of students that looks more similar to him or her, and this would yield a much more accurate projection of what the two schools have to offer.

Q: How are students paying for rising tuition?

Leukhina: To answer this question, we looked at two groups of students: those who went to college in the early 1980s and those who went to college in the early 2000s.

College Cost Changes
Early 1980s Early 2000s
Average tuition paid by a freshman $4,000 $13,600
Average direct cost to student $3,600 $8,600
NOTES: The dollar amounts are quoted in 2000 dollars and are rounded to the nearest $100. The direct cost of college refers to tuition payments minus grants and scholarships.
SOURCE: How Do Students Pay for College? On the Economy blog post by Oksana Leukhina, published Sept. 5, 2019.

We found that the younger group had to rely more heavily on parental transfers, and that is the most important source of extra money. They also worked a little more while in college, and they accumulated a little more student debt. Students’ earnings and annual loans went up by about $1,000 each, and the rest was covered by increased parental transfers. One reason why students’ annual borrowing did not increase so much could be that borrowing limits for government-sponsored loans remain relatively strict.

We also found that there is some evidence for downgrading of the college type to save on tuition costs. While only 30% of freshmen in the 1980s went to community colleges, 36% chose to do so in the early 2000s. The downgrading of college type happened mainly for students who would have typically enrolled in the least selective four-year colleges.

Q: What are the public policy implications from your research?

Leukhina: Conditioning student aid and tuition subsidies or waivers on academic performance is extremely important.

The average dropout rate is about 50% in the United States, and the dropout premium is quite low. It simply does not pay to go to college for one or two years and to drop out. There’s also an opportunity cost for doing this. Instead of unsuccessfully pursuing a bachelor’s degree for one year, some students would actually financially benefit from enrolling in a vocational program.

We also know that college enrollment is incredibly sensitive to small changes in tuition rates. For example, a $1,000 reduction in the cost of attending college leads to a 4 percentage point increase in attendance. That’s a really large effect. The students that respond to this type of subsidy are typically those who are largely indifferent between entering college and not doing so at all. These are typically high school students with less-than-average academic performance. The same students are highly likely to drop out [of college] after one or two years, and this is exactly the type of outcome we would like to avoid.

College Enrollment by High School GPA
Early 1980s Early 2000s
Top quarter GPA 80% Slightly more than 80%
Bottom quarter GPA 20% 20%
Middle range GPA 30-40% 60-70%

Students with GPAs in the top or bottom quartiles had enrollment that stayed about the same, but kids with GPAs in the middle range, especially those whose parents placed in the top half of the income distribution, increased college enrollment “quite a bit,” said Oksana Leukhina, a research officer and economist at the St. Louis Fed.

What I’m suggesting is that a simple conditioning on academic performance, which means there’s no additional cost, would ensure that such wasteful outcomes would be minimized. Of course, all college students should have access to academic support to help them maintain their academic standing, and conditioning financial aid on academic standing will help properly align students’ incentives.

Another important point is that being prepared for college is the single most important factor in predicting students’ success when it comes to graduation outcomes and earnings. A well-known fact is that your high school GPA is an incredibly strong predictor of what happens later in life. All of this means that a dollar allocated to preparing students for college while they’re still in high school probably goes much further than a dollar spent on tuition subsidies.

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Kristie M. Engemann 

Kristie Engemann is an economic content coordinator in the St. Louis Fed’s Public Affairs division.

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