ECONOMIC REPORT OF THE PRESIDENT

Figure 5-5
Variation in Earnings by Educational Attainment
Thousands of Dollars
180
150
10th-90th Percentile
25th-75th Percentile
120
90
60
30
0
High School Associate Bachelor's Graduate
Note: Data are for workers ages 35-44 with positive wage and salary income.
Source: CPS ASEC 2016, CEA calculations
found that students’ forecast errors regarding earnings differences across
majors can affect their major choice (Arcidiacono, Hotz, and Kang 2012).
The effects of poor information and large, difficult-to-forecast variation
in earnings can be particularly detrimental since students cannot diversify
their college enrollment selections. That is, students generally attend
only one school at a time and focus on one or two programs. If they make a
poor selection of college or major, it is costly to switch, as it can be difficult
to transfer credits. This can potentially lock students into a low-quality program.
For some students, the uncertainty of returns itself may prevent them
from enrolling in the first place if they are sufficiently risk-averse (Heckman,
Lochner, and Todd 2006). The combination of high variability and uncertainty
with limited ability to diversify means that some students will realize
small, or even negative returns, from college even if the expected return
is high. The associated uncertainty may also cause risk-averse students to
invest less than they otherwise would in their education.
Prospective students also lack good information about costs. Students
often overestimate college costs—with low-income and first-generation prospective
students overestimating the cost by as much as two or three times
the actual amount (Avery and Kane 2004)—and parents overestimate costs
as well (Grodsky and Jones 2007). Moreover, Hastings et al. (2015) find that
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