Blogs | June 11, 2014

Is tertiary education worth it?

Michele asks: I have read there is “financial risk” associated with going to university. Is this true? Or are people better off getting a tertiary education?

Ian answers: Studies suggest that, in general, education does indeed “pay off” but the earnings premium from tertiary study varies from country to country and can depend on the individual and the subject they choose. Moreover, there is no guarantee that costs incurred will be covered by a higher income over graduates’ working lives. If education is viewed as an investment, then like all investments there is some “financial risk” involved.

Education pays – but not always
Your question came from reading this eZonomics number of the day, which argued there are “financial risks in investing in education”. The number says OECD findings show 18% of university graduates in Canada earn less than half the median income. You reason that the majority must earn more than the median income. Your objection is justified. Education pays. But not always.

The OECD chapter says “on average, tertiary educated individuals are substantially more likely to earn twice as much as the median worker…than those who have not completed upper secondary education.” The OECD found a wide difference between earnings for those who had not completed secondary education and those with tertiary education. What surprises me is that, despite this difference, 18% of tertiary educated Canadians still fell into the lowest pay group. This was why the Canadian figure was highlighted by the OECD.

Location matters
Denmark and Norway were also noted because university or advanced research graduates there were as likely to fall into the lowest earning category as the highest earnings category. A reason highlighted by the OECD for the relatively poor payoff in Denmark and Norway was the low level of extra pay received by tertiary graduates in those countries. So, even if the costs of going to university are relatively low in these countries, the benefits are relatively low too.

In contrast, tertiary educated people in Brazil, Hungary and Portugal are more likely than those elsewhere in the OECD to earn more than twice the median wage. In other countries, the problem is not low benefits but the high costs of getting a tertiary education. These costs can include not only tuition fees but also accommodation and living expenses. The OECD notes that fees charged and support given by public grants and loans vary greatly between countries. For many, tertiary education is not free.

Further, data from the US and the UK indicates the cost of education has risen much more over the past decade than most other costs. It appears that price of education is not only increasing but increasing much more quickly than other prices.

Remember the opportunity costs of study
Students face an opportunity cost as well as financial costs. Both count towards the total costs of deciding to study. Looking at examples from the US, Boston University economics professor Laurence Kotlikoff argued on Bloomberg in 2011 that it is possible that the lifetime earnings of a doctor in the US could be less than that of a plumber. A separate study by Herwig Schlunk in 2009 also questioned the payoff of going to a private law school in the US. Part of the reason is that people who don’t go to university have extra years to earn and build experience in the workforce, and the high fees in some US universities also play a part too.

It’s not just about the money
People undertake tertiary education for a variety of reasons and – even an economist can recognise – it is not always about money. It can be a fulfilling and enjoyable experience.

However, financial risks are involved. There is no guarantee of financial reward. One final observation, if you decide to start a college degree, don’t give up part way through. A 2013 study found that even those who get a marginal pass benefit financially while those who fail to complete do not earn significantly more than those who complete secondary education. In other words, stick with it.


Ian Bright
Ian Bright

Senior economist at ING
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