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Op-Ed

Increase social mobility by reducing risk in higher education

Higher education is often seen as an important enabler of upward social mobility. President Obama remarked last year that “higher education, more than ever, is the ticket to the middle class.”

But is it? First, it’s important to understand whether higher education boosts wealth. This one’s easy. The evidence is clear: Individual investments in higher education pay large dividends. Some of the best estimates indicate that the rate of return on associates and bachelor’s degrees is about 14 percent. This takes into account both the upfront costs of going to college and the long-run benefit of future wages. So even if individuals need to rely on credit to finance their education, it’s typically worth it in the long run. This tells us that higher education is in fact an activity that builds wealth and can potentially serve as a mechanism for mobility.

But there are many wealth-building activities that do not function well as mechanisms for mobility, because they aren’t accessible to lower wealth individuals. Investing in the stock market, for example, generates wealth, but only if you have money to invest in the first place. So it’s worth asking whether higher education is in fact working to help lower income individuals improve their economic well-being. Essentially, does higher education succeed in lowering intergenerational “stickiness” of socioeconomic status?

Unfortunately, the evidence doesn’t paint as rosy of a picture as we’d like to see. New evidence shows that a college degree might be worth less if you’re raised poor. We can’t say for sure why this is the case, but it’s easy to imagine a number of reasonable explanations. For instance, it’s likely that students who grown up in poorer families attend lower quality institutions. The disparity in returns is so large that individuals who are born into poor families (the lowest quintile of the income distribution) and manage to graduate from college have the same chance of staying in the bottom income quintile as people who are born into rich families (higher income quintile) and don’t complete high school.

Even if the payoff were the same for both rich and poor students, college appears to be out of reach for a disproportionate number of people born into low income families. Only nine percent of individuals born into the lowest income quartile will ultimately earn a college degree, compared to 54 percent in the top income quartile. Taken together, these things tell us that higher education fails to be the great equalizer that we’d really like it to be.

So what can we do to make our system of higher education play a bigger role in supporting social mobility? First, we need to help students make better decisions about college enrollment. For a long time we’ve hesitated to talk about education as a financial investment, but that has a done a disservice to the students who can’t really afford the luxury of turning a blind eye to the economic consequences of their decisions. We need to empower students to make good decisions by publishing data on the labor market returns of each program of study covered by the federal student aid program. A large step on this front was taken last year when earnings data for each college was published on a government website. But program level information is also necessary so that students can choose courses of study that are likely to lead them to jobs that will make their college costs worth it.

In addition to helping students to make savvier choices, we need to remove an invisible barrier to college access: risk. Generous loan limits in the federal aid program paired with a robust private loan market mean that almost any student can find the money they need to enroll in college. In that sense, college is already affordable to all. But college doesn’t always pay off in the long run. Like any investment, it’s a gamble. And it’s a gamble that not everyone can afford to take. Fortunately, there are plenty of ways to reduce the risk of investing in higher education including a more robust income driven repayment system in the federal loan program, private market financial products that offer insurance to student borrowers and new business models that offer guarantees to students.

In a market economy, there is no silver bullet solution that can eliminate the stickiness of socioeconomic status from one generation to the next, but innovations on these fronts could succeed in allowing higher education to become at least a more effective engine for social mobility.

Editor’s note: This piece originally appeared in Real Clear Markets.

Author

Beth Akers

Former Brookings Expert

Senior Fellow - Manhattan Institute

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