High Rates of Return on College Education Comes with High Risk

Attending college has been considered one of the most protable investments, annualized returns ranging from 8% to 13% (Card 1999). I utilize a simple approach, as in Mehra and Prescott (1985), to quantify how much of the excess return to college is explained by its risk. I also explore the role played by heterogeneous ability by developing a life-cycle model with endogenous enrollment and analyzing the dropout risk effect on college returns.

Under the risk premium approach, the permanent income shock on wages explains 1% of the excess return to college education. Dropout risk explains 22% of the estimated excess return. Both sources of risk combined explain 51% of the excess return to college education.

Notes:

Folksonomies: economics education academia investment

Taxonomies:
/education/graduate school/college (0.634402)
/finance/investing/stocks (0.421614)
/finance/personal finance/lending/credit cards (0.354450)

Keywords:
excess return (0.971148 (negative:-0.472384)), college education (0.796306 (negative:-0.365619)), dropout risk effect (0.687273 (neutral:0.000000)), High Risk Attending (0.675237 (neutral:0.000000)), permanent income shock (0.626951 (negative:-0.468354)), risk premium approach (0.588088 (neutral:0.000000)), protable investments (0.517793 (neutral:0.000000)), endogenous enrollment (0.481189 (neutral:0.000000)), High Rates (0.458365 (neutral:0.000000)), life-cycle model (0.456232 (neutral:0.000000)), college returns (0.441109 (neutral:0.000000)), simple approach (0.436829 (positive:0.577439)), Mehra (0.291429 (neutral:0.000000)), wages (0.260594 (negative:-0.468354)), Prescott (0.259423 (neutral:0.000000)), Card (0.251213 (negative:-0.207196)), role (0.246042 (negative:-0.245262)), ability (0.244913 (neutral:0.000000))

Entities:
Mehra:Person (0.940716 (neutral:0.000000)), Prescott:City (0.804637 (neutral:0.000000)), Card:Person (0.779385 (negative:-0.207196)), 13%:Quantity (0.779385 (neutral:0.000000)), 22%:Quantity (0.779385 (neutral:0.000000)), 51%:Quantity (0.779385 (neutral:0.000000)), 1%:Quantity (0.779385 (neutral:0.000000)), 8%:Quantity (0.779385 (neutral:0.000000))

College Risk and Return

Periodicals>Journal Article: Castex, Gonzalo (August 2010), College Risk and Return, American Economic Association, Retrieved on 2015-03-08

Folksonomies: academia risk

Schemas

08 MAR 2015

Is College Worth It?

Are PhDs a pyramid scheme? Are college returns worth the risk of failure and massive debt?

Folksonomies: economics academia debt student loans