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  • Adriene: Welcome to Crash Course Economics, I’m Adriene Hill

  • Jacob: and I’m Jacob Clifford. Some of you might be watching this video in school right

  • now, but even if youre not, youve probably spent a good chunk of your life getting educated.

  • Adriene: Nearly all countries require at least some mandatory schooling and most of those

  • countries provide that education for free.

  • Jacob: But nothing is ever actually free. There’s always an opportunity cost. The money

  • and resources that go into education might be used to fund other social programs or bring down the debt.

  • Adriene: And if you go to college, the cost is not just the tuition and books, it’s

  • also the income you could have earned by going straight into the workforce.

  • Jacob: But is college even worth it? Well, let's look at the economics of education.

  • [Theme Music]

  • Adriene: Why do governments spend billions funding universal public education? Why not

  • just let profit seeking businesses handle it? Many argue that if education was entirely privatized

  • it’s likely that some children would be excluded, and that would make society, as a whole, worse off.

  • Education is a positive externality. Education benefits individuals by helping them get a

  • job and earn more income, but it also benefits society as these individuals create art, invent

  • cool stuff, cure diseases, and make interesting conversation at parties. More education increases

  • productivity, GDP, and standards of living.

  • So, today were going to look at the education system in the United States. Were talking

  • about the US not only because we make Crash Course in the US, but because education in

  • this country is going through a lot of changes. This way, we get to talk about things like

  • education standards, vouchers, and student debt.

  • Now, to be sure, there are places that do things differently. For example, in the European

  • Union college costs a lot less than it does in the US, or is even free.

  • In America, the government pays for primary and secondary public education and heavily

  • subsidizes college. In 2015, the federal and state governments will spend about 634 billion

  • dollars on primary and secondary education. That’s an average of about 12,500 dollars

  • per student each year. Which is a lot of money.

  • And despite all that spending, the US has some serious problems with its education system.

  • One of the biggest is inequality. Students from low income families tend to have lower

  • math and reading test scores than those from higher income families. African American,

  • Latino, and Native American students are much more likely to drop out of high school than

  • their White or Asian counterparts.

  • Jacob: For some economists, the best way to level the playing field is to focus on funding.

  • They argue that the government should pay for early education programs, and provide

  • extra money for disadvantaged and low-income students.

  • For others, the answer isn’t just about more funding, it’s about having more competition.

  • Some economists support charter schools and voucher programs that allow parents to pick

  • schools, or open enrollment among or within school districts.

  • Now in theory, this forces all schools to improve, or face losing their funding. Other

  • economists focus on the teachers, and argue that they should be incentivized to improve student performance.

  • Each of these ideas have been implemented in the US, with varying success. We have yet

  • to find the magic formula, but it’s clear that the first step to improving equality

  • is to invest in primary and secondary education.

  • Now, what about higher education? Is that a good investment? Well, keep in mind that

  • there are many reasonsnot all of them economic - to go to college, and to be educated

  • in general. People go to college because they enjoy learning and want to know more. Or maybe

  • they want to put off getting a real job. But in economics, we focus on financial benefits. So, is college worth it?

  • The fact is, college graduates, on average, earn more. Economists call this theCollege Wage Premium.”

  • Among 25-32 year-olds, college grads earn an average of $45,000 vs $28,000 for those who only

  • have a high school diploma. Also, the unemployment rate for college grads is pretty much always lower.

  • Right now, for people over 25 with a college degree, unemployment is around 3%. Now, that's vs. around

  • 5.4 percent for those with only a high-school diploma. And it’s 8.6 percent for those who didn’t

  • finish high school. So bamcollege pays off, case closed.

  • Adriene: Well, not quite. The people who graduate from college are NOT a randomly selected group.

  • First, it takes a modicum of intelligence and dedication to even get into college. Second,

  • you have to receive a fairly good primary and secondary education to be able to keep up with college work.

  • Third, the students who attend college are more likely to come from well-off families

  • with educated parents who have the time and energy to help encourage their success.

  • So when you compare college grads to those with less education, youre often comparing

  • people from advantaged backgrounds to people without many of those advantages. The fact

  • that college graduates make more money isn’t just about college. It’s also about life

  • circumstances. Let’s go to the Thought Bubble:

  • Jacob: Economists point out two main explanations for why college graduates earn more. The first

  • is theHuman Capitaltheory. The idea is that going to college actually teaches

  • you skills thatll help you get a higher income job. The second theory is calledSignalling.”

  • This is the idea that some students have shown they're smart and hard-working, but in a job interview,

  • EVERYONE is going to claimSure, I’m smart and hard-working!” even applicants

  • who aren’t. So the talented applicants need something else to validate their abilities

  • that can’t be faked by others. A college degree sends a clear signal. "Look at me!

  • I graduated Summa, and I’ve got the notarized transcripts to prove it!"

  • Many employers would prefer an applicant that has an actual Harvard degree over one that

  • has an equivalent self-taught education. But a college degree isn’t only about signaling

  • ability, we could accomplish that with a test that would take one day and $100, rather than

  • 4 years and potentially hundreds of thousands of dollars. College degrees send other signals

  • about socio-economic status and background.

  • BOTH the human capital theory and the signalling theory are compatible with the data: both

  • predict that college graduates would earn more, which is what we see.

  • But economists have tried to figure out which theory is correct. They have compared the

  • earnings of people who have earned 7 ½ semesters worth of college credits but didn’t graduate,

  • to people who finished and got a degree. Both groups received about the same amount of education,

  • so if the Human Capital theory is correct, they should earn about the same amount of

  • money. If the Signalling theory is correct, those with degrees should earn noticeably

  • more, and they do. But it’s a smaller gap than you would find from just comparing high

  • school and college grads. It seems that both theories apply.

  • Adriene: Thanks Thought Bubble. Okay, so we know that there are significant financial

  • benefits to completing college. But what about the costs? Going to college can be really

  • expensive. Often more than most families can afford. In the US, students have over 1 trillion

  • dollars of debt. That’s more than Americans owe on their cars or their credit cards!

  • More students are attending college than ever, and more of those students are paying for

  • at least part of their education with loans. In 2012, almost 70 percent of students took

  • out loans to pay for tuition, and the median amount they borrowed was around 27,000 dollars.

  • By comparison, in 1993, the median amount students borrowed was around 12,500 dollars.

  • And that’s just the median. So even if some of the hand-wringing over the total amount

  • of student debt is overblown, the average student really is taking on a larger burden.

  • So, this is all thanks to higher tuition, right? Well, not exactly. At four-year public

  • universities, the average cost of tuition, room and board has gone from $10,600 dollars

  • in 1994 to $18,900 in 2014, when you adjust for inflation. The average tuition at comparable

  • private universities has risen from $26,500 to $42,400 during the same period.

  • But that rising tuition number is thesticker pricefor collegein fact, most students

  • receive very substantial discounts. Students from wealthy families, with not-so-great SAT

  • scores might pay that full sticker price, but once you factor in cost reductions from

  • scholarships, fellowships, grants and other sources, many students pay substantially less.

  • Once you adjust for discounting, the rise in net tuition has been kind of modest.

  • So, why all the debt? Well, for-profit colleges and universities might be contributing to this.

  • Students at these schools tend to take on more debt than students at public schools

  • or private non-profits. It’s also possible that student debt is rising because graduate

  • school enrollment is up. And grad students borrow more than undergrads.

  • Another reason tuitions are increasing is because the actual cost of running a college

  • is higher than a few decades ago. As some schools compete for students and their money,

  • some of them build luxurious dorms, climbing walls and gourmet dining to attract revenue.

  • Another possibility is that colleges now employ more administrators and pay them a whole bunch of money.

  • Jacob: So, in cold, hard, merciless dollars, does it make sense to spendor borrow

  • - a bunch of money on a college degree? Well, it depends a lot on the degree you get, but

  • on average the answer is, yes -- as long as you finish!

  • Many of the worst student-debt horror stories involve students who racked up large debt,

  • but were unable to finish college. And that’s surprisingly common: Every year in the US,

  • 60% of high-school graduates enroll in college, but only a little over half actually graduate

  • within 6 years. That’s right: only half.

  • But what about students that don’t have the means or the inclination to go to a four-year

  • university? Are they doomed to live in squalor? Well, no, but again better money can be found

  • in careers that require specific training and skills, which can be learned through a

  • community college or through an apprenticeship. The average car mechanic earns $40,000 a year;

  • the average plumber earns $50,000; and the average electrician $55,000. And as more young people

  • opt to go to college and as older people in these careers retire, most economists expect these wages to rise.

  • So what is the final conclusion? Is college even worth it? Well, I guess in the end, we

  • have to say, it depends. It depends on where you go to school; how much you pay for your degree;

  • and it depends on what degree you get. And, of course, on what you want to do with your life.

  • Adriene: Education isn’t just another thing that you buy. It isn’t only about individual

  • gain. There’s a social aspect, too. We want everyone to have access to quality education

  • because having an educated populace benefits all of us. Education can also be a powerful

  • tool when it comes to reducing poverty and addressing income inequality, and we're gonna

  • talk about that next time. Thanks for watching!

  • Jacob: Thanks for watching Crash Course Economics. It was made with the help of all these nice people.

  • You can help keep Crash Course free, for everyone forever by supporting the show

  • at Patreon. Patreon is a voluntary subscription service where you can support the show with

  • a monthly contribution. Thanks for watching! DFTBA.

Adriene: Welcome to Crash Course Economics, I’m Adriene Hill

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