We all know that college is expensive. It is one of the largest expenses an individual will face, and often it’s the first of the major ones in their lifetime – made at a time when social pressures and a lack of experience are more likely than ever to push one down an expensive trail with financial implications for your lifetime in terms of both cost and reward.

I read the book “The Case Against Education: Why the education system is a waste of time and money” by Bryan Caplan, to think about why our education system is the way it is today, what are the drivers for how did we get here, and what’s keeping us here.

The Importance of Signaling

Obviously, if you are aiming for a career with a large employer and high technical knowledge, you have to learn a lot of information and send the correct social signals that you are a hard worker in order to be hired. For example, if you want to be a doctor or an engineer, college is the right path for you. But for other people, the path is not as clear cut.

Already in the introduction, Caplan is laying out the value of “signaling”. Compared to dropping out of high school, high school graduation is rewarded by employers with a signaling premium of 30%, for showing that you could stick out the boring days and turn in enough assignments and learn enough to pass. Even though in most careers, what you do in your daily job is based on what you learn on the job (not what you learned at college), college graduation is rewarded with a 70% premium on average over graduating high school. The degree proves that you have the right stuff to get through to graduation, in a way that just claiming you found a more efficient way to do things doesn’t.

Now if you turn to advanced degrees, in 2011 data from the US Census Bureau that Caplan reports in Table 3.1, there’s a 122% premium for a masters degree compared to high school graduation.

Figure 3.2 is frustrating to me as a woman. It’s about earnings by sex, by profession, and relative to a specific major (education) graduated with; so the ratios theoretically already adjust for the fact that women earn less. Only in electrical and mechanical engineering then did women’s premium for the higher majors actually pay off at the same rate as they did for men. The earnings premium for computer science dropped from 75% to 57% for women, in economics from 74% to 49%, and in finance from 74% to 41% for women. This graph was also based on only those who worked more than 34 hours per week so the standard part time options of half time, 3/4 time, or 4 days a week were already excluded. In other words, women were opting out of the lucrative professions of computer scientist, financier, and economist into the much lower paying professions of female computer scientist, female financier, and female economist (to paraphrase a quote my husband dredged up from somewhere). But to get back to the main thread of the book, almost all of these majors graduated with provided a college premium above that of an education major. And education majors earned 27% more than high school graduates.

Also in Chapter 3 is the tidbit that about 12% of high school dropouts need governmental licensing in order to do their jobs. And 44% of workers with advanced degrees need governmental licensing in order to do their jobs. There’s an overall average of almost 30% needing governmental licensing among US workers. The impact of licensing is that it raises incomes by 10-15%, by restricting competition.

The Guidance Roadmap

Chapter 5 gives quick and dirty advice:

1. Finish high school.
2. College isn’t for everyone, or even for most. If you do go, be going for a degree that makes economic sense, pursue it at respected public school (translates to one that won’t break the bank in the short term, and will pay off in the long term), and work full time after graduation instead of giving away part of your potential ROI.
3. Most masters degrees don’t make sense.

Caplan also covered some other steps on the educational ladder, for those considering them:

• Associate degrees completion rates are very low, among full-time students in 6 years, only only 58% will have finished their 2 year degree. Economic premium is also essentially non-existent, except in vocational training such as for nursing.
• PhD’s are only completed by half of the people who undertake them.
• Professional degrees tend to have incredibly high bars for admissions standards, and even then only about 80% of medical students finish their degrees on time.

The book’s conclusion

The book continues on through Chapter 10, an appendix, and many notes and references. But the most important piece in my mind wraps up at the end of Chapter 5:

“Your career hinges on your educational path. Wherever you turn, you’re betting years of your life – and often tens of thousands of dollars. … Crunch the numbers until you have numbers to live by.”

Develop a spreadsheet of you, understand about signaling in the employment environment, and make choices that have a good financial likelihood of lifetime payoff, not just for you but for society.

My addendum: Entrepreneurship

For much of modern man’s history, the only way to learn things was through apprenticeship to masters, or more recently via college. Today, free or low cost education is available to everyone through the purchase of textbooks and online courses. What we need to know to do our jobs may be more than ever, but for many careers it’s not nearly to the level that a college or professional degree takes us to. This signaling process that employers are forcing society to take on as both a society cost (free or subsidized schooling, subsidized loans) and as an individual cost (college and college loans) is growing out of control with no cost to the employers. Don’t forget that there is another way out, and that way is called entrepreneurship. For those with both the intelligence and the motivation, you can learn anything and everything you need or want to learn, in a very cost efficient manner, and not be held to the signaling standards enforced by employers.