ECONOMIC REPORT OF THE PRESIDENT

The economics literature provides some evidence that credit constraints
faced by students upon graduation can affect career choices. In
particular, Rothstein and Rouse (2011) find that having more debt to repay
reduces the probability that graduates choose lower-paid public interest
jobs, especially jobs in education. Similarly, Luo and Mongey (2016) estimate
that larger student debt burdens cause individuals to take higher-wage
jobs at the expense of job satisfaction, likely due to credit constraints after
graduating, and that this reduces their well-being.
Information Failures and Procedural Complexities
Yet another obstacle that prevents some individuals from making
high-return investments in college is limited information about the associated
benefits and costs, which leads to poor decisions and to underinvestment.
Survey-based research yields mixed findings on whether students
underestimate or overestimate the returns to college (Betts 1996; Wiswall
and Zafar 2013; Baker et al. 2016) but suggests that students generally view
their future earnings as uncertain (Dominitz and Manski 1996). Consistent
with this view, one study estimates that only 60 percent of the variability
in returns to schooling can be forecasted (Cunha, Heckman, and Navarro
2005).
Underlying this uncertainty about the return to college is the fact
that, while this return is high on average, it is also quite variable. This variation
is illustrated in Figure 5-5, which shows the distribution of earnings
by educational attainment. For example, while workers with a bachelor’s
degree are far more likely to have greater earnings than those with only a
high school diploma, there is a fraction whose earnings are similar to the
earnings of those with only a high school diploma. Ten percent of workers
age 35 to 44 with a bachelor’s degree had earnings under $20,000, compared
with 25 percent of workers with only a high school diploma (CPS ASEC,
CEA Calculations).
The variation in the returns to college is driven by a number of
factors; however, one important determinant of both the variability and
student uncertainty about these returns is the large variation in the quality
of schools and programs of study—which can be hard for potential students
to assess. A growing body of literature shows that college quality matters
both for completion and for earnings,7 with some pointing to relatively poor
returns at for-profit institutions (Cellini and Turner 2016). Studies have
also estimated highly variable returns by college major for bachelor’s degree
recipients (for example, Altonji, Blom, and Meghir 2012), and others have
7 For example, see Bound, Lovenheim, and Turner (2010); Cohodes and Goodman (2014);
Goodman, Hurwitz, and Smith (2015); Hoekstra (2009).
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