By Jeffrey Lacker, President of the Federal Reserve Bank of Richmond.
What path should a student choose after high school? Apply to college? Join the workforce? Enroll in career or technical training? Median earnings for college graduates are around $50,000 annually, compared to $28,000 for high school graduates, while the unemployment rate for college graduates is 3.4%, nearly half the 6.4% rate that high school graduates currently face. Given the numbers, it might be tempting to conclude that college is the best path for everyone. However, this recommendation takes into account neither the uncertainty lurking behind the reported numbers nor the preferences and constraints of the individual.
In recent times, only about half of the students who start at a four-year college complete a bachelor’s degree within six years. Moreover, starting college but not finishing provides only a small increase in earnings compared to what high school graduates get. And maybe worst of all, students and their families often borrow along the way. The average debt burden among students who drop out of college with debt is $14,000.
What accounts for the high rate of non-completion? Research suggests that preparedness and self-knowledge are central to completion. Surveys find that freshmen tend to overrate their ability to succeed in college. As they progress through college, many revise their expectations downwards and end up dropping out—often after more than two years. On the flip side, research also shows that some low-income, very high-achieving students fail to apply to selective colleges because they overestimate the costs of college and underestimate opportunities for financial aid. In other words, while post-secondary choices carry enormous consequences, for better and for worse, they are choices that many appear to confront with only limited information.
CEE recognizes the value of understanding the economic impact of decision making. If the consequences of a decision are large and, as with college, the decision is not easily reversed, getting it right is particularly important. Financial education efforts at the Richmond Fed are focused on providing reliable information to help people with their decision making. This year we’re piloting a new course called “Invest in What’s Next: Life After High School” that helps students explore and evaluate various education paths and assess their own readiness for higher education. The course will provide an interactive decision framework that takes into account students’ career interests, desired lifestyle, education costs and funding so that students can learn to make informed assessments of their options based on their individual circumstances.
There’s a lot more to post-secondary choice than enrolling in college. But for those who wish to follow this path, there appears to be scope to increase completion rates by improving preparedness and awareness of the demands of college and the costs it carries. Such improvements would also benefit those who ultimately choose not to go to college: they would be doing so, after all, in light of an accurate perception of their options. There also appears scope to bring in more talented youth to college who, if equipped with accurate information on the costs, would enroll and complete a degree.
Arguably, the most important role that financial education can play for all students is to improve the information that they are armed with by the time, and ideally, well before, they reach the key fork in the road after high-school.