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Dropouts, Taxes and Risk: The Economic Return to College under Realistic Assumptions

34 Pages Posted: 15 Sep 2013 Last revised: 27 Jan 2015

Alan Benson

University of Minnesota - Twin Cities - Carlson School of Management; Massachusetts Institute of Technology (MIT)

Raimundo Esteva

Independent

Frank S. Levy

Massachusetts Institute of Technology (MIT) - Department of Urban Studies & Planning

Date Written: January 26, 2015

Abstract

Most published estimates of the economic return to college rest on a series of best-case assumptions that often overstate returns and, most importantly, obscure differences in return across different institutions. We simulate the economic return to college under more realistic assumptions using U.S. Census data combined with administrative data from the more selective University of California system and the less selective California State University system. Specifically, we adjust for delayed graduations, the probability of dropping out, progressive taxes on earned income, and risk aversion. We perform a bounding exercise for ability bias. These each reduce expected returns to a Bachelor’s degree. Contrary to prior “best case” estimates, and under reasonable bounds for the ability bias, we find that the return to a college degree in 2010 could be less than the interest on unsubsidized Stafford loans. Returns are particularly modest for young men at the less-selective CSU system, largely due to high dropout rates, delayed graduation, and a lower effect on labor force participation compared to women. Our analysis begins to bridge the gap between standard estimates of the economic return to college and the institutional performance metrics reported in the Obama Administration’s College Scorecard.

Keywords: Higher Education, Educational Investment, Returns to Education

JEL Classification: I2, J24

Suggested Citation

Benson, Alan and Esteva, Raimundo and Levy, Frank S., Dropouts, Taxes and Risk: The Economic Return to College under Realistic Assumptions (January 26, 2015). Available at SSRN: https://ssrn.com/abstract=2325657 or http://dx.doi.org/10.2139/ssrn.2325657

Alan Benson (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://https://sites.google.com/site/amb263/

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

HOME PAGE: http://web.mit.edu/alanmb/www/index.htm

Raimundo Esteva

Independent ( email )

Frank S. Levy

Massachusetts Institute of Technology (MIT) - Department of Urban Studies & Planning ( email )

77 Massachusetts Avenue
Room 9-523
Cambridge, MA 02139
United States
617-253-2089 (Phone)

HOME PAGE: http://web.mit.edu/flevy/www

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