Home>Video>What's the College Degree Payoff?

What's the College Degree Payoff?

Wed, 30 Jul 2014

College remains a good long-term investment, but years of stagnant wages and student debt await recent graduates.

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Video Transcript

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Welcome to College Radar. Joining me to discuss some recent developments on the college-funding front is Adam Zoll. He is assistant site editor for Morningstar.com. Adam, thank you for being here.

Adam Zoll: Thanks for having me.

Benz: Adam, a recent study looked at whether college is worth it. Let's talk about the findings there.

Zoll: The Federal Reserve Bank of New York recently came out with some numbers looking at the return on investment for a college degree today and in years past. What it found was that, over the past decade, there has been a pretty consistent return rate of about 15% on having a college degree. This is basically the difference between wages for somebody with a college degree versus someone with only a high school degree once you factor in the cost of going to college. That 15% rate has been pretty consistent. It's kind of a good news/bad news story, though, because part of the reason for this persistent gap--even considering the higher rate of inflation--is that wages for people without a college degree just have not been keeping pace. So, there is a hidden undercurrent that is explaining the persistence of what they call the college wage premium.

Benz: The study also looked at which majors give you the best return on your investment. Let's talk about the best-performing majors in terms of financial remuneration.

Zoll: As one might expect, the STEM areas of study [science, technology, engineering, and mathematics] did particularly well. Number one on the list, engineering, provided about a 21% return on investment, followed by math and computer-related majors at 18%, then health at 18%, and business at 17%. Bringing up the rear was education at 9%. Across the board, you see there is some variety. But regardless of major, having a college degree obviously does pay off.

However, one of the takeaways here is that your choice of major is going to probably weigh into how much you earn once you leave school. So, [it's important to] factor that into your decision in terms of how much you spend with regard to where you go to college.

Benz: Another study just released, Adam, looked at the rate of wage growth for new graduates. It showed a pretty bleak picture for new graduates since the Great Recession. Let's talk about that.

Zoll: College grads may be outearning people without college degrees, but recent college grads are having trouble keeping up in terms of wage growth with older workers who have been in the workforce awhile. A study by the Federal Bank of San Francisco found that since 2007 workers overall have received, on average, about a 15% pay raise--that's overall during that time period--whereas new graduates have only gotten about a 6% pay bump.

One of the reasons for this is that new grads are generally in entry-level jobs that are a bit more vulnerable to the economic cycle, whereas older workers or more experienced workers may be a bit more stable in terms of their job security and their potential to earn raises.

Overall, it's important that people who are in college now or those who will be graduating soon as well as recent college grads keep in mind that, while having a college degree is a great entryway to the workforce, if you are hoping for a high-paying job or even a job that is paying up to a certain standard, you may need to be a little more patient than in years past.

Benz: Yes. I think new grads have been happy just to a job. Period.

Zoll: That's true.

Benz: Let's switch gears a little bit. Another headwind confronting today's new grads is that a lot of them are coming out of school with a lot of debt. Let's talk about what's going on with interest rates on some of these student loans.

Zoll: This coming school year, for the first time, interest rates are going to move in accordance with prevailing market rates--in particular, the 10-year Treasury note. So, the Undergraduate Stafford Loan, which is the most widely used federal loan, is going to rise from 3.86% last year to 4.66% this coming year.

What does that actually mean in terms of dollars and cents? Not a whole lot. On a $10,000 federal student loan, it's going to be about $46 more per year to service that loan. So, it's not a huge change, but it's important to remember that student loans, moving forward, are going to be tied to prevailing rates as opposed to being set by Congress for a fixed amount of time as they were previously. Also, just to clarify, the loans are fixed for the life of the loan. However, the rate that will be offered each year will change according to those market rates.

Benz: In a related vein, there are these companies that offer to help students settle their debt or lower their student loan debt. You note that the Illinois Attorney General is taking a look at some of the business practices of some of these firms. What's going on there?

Zoll: Here, in Illinois, the Attorney General just filed suit against two of these student loan debt-settlement companies. These are companies that take an upfront fee in exchange for a promise to help you lower your student debt or in some cases maybe even [help get] some of the debt forgiven. In these cases, [the Attorney General alleges that these companies] did not deliver on those promises.

This is part of a larger trend. There's more than $1 trillion of student debt out there. Some of these debt-settlement services that you may have previously heard advertising to help settle your credit card debt or your mortgage debt have moved into the student loan debt space. Some of them may be responsible operators, but there are certainly some irresponsible operators out there also.

I would caution anybody who is considering using one of these services to really check closely what the provisions of the agreement are. Also, before you go to one of these services, look at the Federal Student Loan website. There are loan-consolidation services and loan-forgiveness programs that cost nothing. You shouldn't have to pay a loan aggregator or one of these debt-settlement services for these services. In many cases, you can do this on your own. So, I would definitely say buyer beware.

Benz: [In short,] see what sort of advice you can get for nothing on this front before you even consider paying a third party.

Zoll: Absolutely.

Benz: Adam, thank you so much for being here.

Zoll: My pleasure.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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