Economic Brief

June 2013, No. 13-06

Implications of Risks and Rewards in College Decisions

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Despite a large and growing earnings premium for college graduates, growth in college enrollment and especially college attainment in the United States has been quite slow. The labor market's apparent lack of responsiveness to the earnings premium may be driven in part by the risks that marginally prepared students face when they go to college. Failing or dropping out could leave them with low wealth, high debt, and low earnings. Recent research indicates that neither further increases in the earnings premium nor reductions in college costs are likely to produce large increases in the college completion rate. And if technological change continues to increase the demand for skilled labor, both the earnings premium and income inequality will continue to grow.

Additional Resources

Abbott, Brant, Giovanni Gallipoli, Costas Meghir, and Giovanni L. Violante, "Education Policy and Intergenerational Transfers in Equilibrium," National Bureau of Economic Research Working Paper No. 18782, February 2013. (A discussion paper version is available online.)

Athreya, Kartik, and Janice Eberly, "The Supply of College-Educated Workers: The Roles of College Premia, College Costs, and Risk," Federal Reserve Bank of Richmond Working Paper No. 13-02, March 5, 2013.

Bound, John, Michael F. Lovenheim, and Sarah Turner, "Why Have College Completion Rates Declined? An Analysis of Changing Student Preparation and Collegiate Resources," American Economic Journal: Applied Economics, July 2010, vol. 2, no. 3, pp. 129-157. (A previous version is available online.)

Caucutt, Elizabeth M., and Krishna B. Kumar, "Higher Education Subsidies and Heterogeneity: A Dynamic Analysis," Journal of Economic Dynamics and Control, June 2003, vol. 27, no. 8, pp. 1459-1502. (A previous version is available online.)

Chatterjee, Satyajit, and Felicia Ionescu, "Insuring Student Loans Against the Financial Risk of Failing to Complete College," Quantitative Economics, November 2012, vol. 3, no. 3, pp. 393-420.

Guvenen, Fatih, "Macroeconomics with Heterogeneity: A Practical Guide," Federal Reserve Bank of Richmond Economic Quarterly, Third Quarter 2011, vol. 97, no. 3, pp. 255-326.

Kane, Thomas J., "College-Going and Inequality: A Literature Review," Russell Sage Foundation Working Paper, June 30, 2001.

Lee, Donghoon, "Household Debt and Credit: Student Debt," Federal Reserve Bank of New York, Presentation, February 28, 2013.

Restuccia, Diego, and Carlos Urrutia, "Intergenerational Persistence of Earnings: The Role of Early and College Education," American Economic Review, December 2004, vol. 94, no. 5, pp. 1354-1378. (A working paper version is available online.)