A main reason students enter college is the college skill premium—the ability to make more money over their lifetimes than high school graduates. Although circumstances vary, reasonable estimates indicate that by their mid-30s college graduates fully funding their college education with student loans will surpass the lifetime earnings of high school graduates (Figure 3). For example, assuming the average cost of attending college (including room and board) is approximately $26,500 per year ($16,000 for public college and $37,000 for private college), a student who completely finances four years of college with loans will accumulate just over $100,000 in debt. Assuming the student pays off that debt (with interest) and earns a skill premium of 74 percent after graduation, by age 34 he or she will surpass the lifetime earnings of a high school graduate.
Fear of dropping out of college (failure risk) or not being able to find a high-paying job after graduation (earnings risk) are real concerns for many. Assuming the same yearly college costs noted above, a student who drops out of college after two years will accumulate just over $50,000 in debt and enter the labor force with a much lower skill premium. The student will be saddled with student loan debt (plus interest) but earn only 15 percent more than a high school graduate. As a result, his or her lifetime earnings will remain below those of a high school graduate well beyond retirement (Figure 4).
Earnings risk is slightly more complicated because of the many different scenarios that could affect potential earnings. Comparison of data, however, show that in the majority of cases the lifetime earnings of a college graduate will outpace those of a high school graduate (Figure 5): By age 27, the earnings of a college graduate will surpass those of a high school graduate. To match the lifetime earnings of a college graduate at the lowest end of the earnings spectrum, a high school graduate will have to work into his or her 60s.
NOTE: The shaded band shows the present value of lifetime earnings of a college graduate earning a skill premium between 125 percent ($73,125 per year; top of the band) and 25 percent ($40,625 per year, bottom of the band). All calculations assume a 5 percent interest rate on student loan debt and a 3 percent discount rate.
SOURCE: College Board Advocacy and Policy Center. “Trends in College Pricing.” 2010, p. 15, Figure 1.