Case Study 2 — The Cost of College, Worked Through

This case study extends the example from §1.2 of the textbook. We're going to compute, in some detail, the real cost of going to college — and use that calculation to evaluate the question students and parents ask all the time: is college worth it?

The numbers below are illustrative. Real numbers vary by school, by major, by region, by year, and by individual circumstances. The point is the framework, not the exact dollars. By the end of the case study, you should be able to redo the calculation for your own situation.

Setup

Suppose you are an 18-year-old high school graduate in the Midwest in 2025. You are trying to decide whether to go to college full-time at Millbrook State University (a fictional public regional university that stands in for a real one — think University of Northern Iowa, Eastern Illinois University, Western Kentucky University, Indiana State, or any of dozens of similar schools). You will be an in-state student, and you will live in the dorms for the first two years and a shared apartment for the last two.

The alternative is to work full-time at one of the available jobs in Millbrook (the food processing plant, the regional hospital, retail, restaurant work). High school graduates without college can find full-time work in Millbrook fairly easily; the median starting wage for a Millbrook 18-year-old high school graduate without a college degree is about $16 an hour, or roughly $33,000 a year for a full-time entry-level job.

The decision is: college, or work?

Computing the cost

Let's add up what college actually costs you over four years.

The visible costs (the price tag)

These are the numbers you see on Millbrook State's website.

  • Tuition and fees: ~$10,000/year × 4 = **$40,000**
  • Room and board (dorm + meal plan): ~$11,000/year × 2 = **$22,000**
  • Room and board (off-campus apartment): ~$9,000/year × 2 = **$18,000**
  • Books and supplies: ~$1,200/year × 4 = **$4,800**
  • Personal expenses (clothes, phone, transportation, etc.): ~$3,000/year × 4 = **$12,000**

Total visible cost: $96,800 over four years.

This is the number that shows up in the news when reporters write about "the cost of college." It is a real number. It is also incomplete.

The invisible cost (opportunity cost)

Now add the wages you would have earned if you had taken the full-time job instead of going to college.

  • Year 1: $33,000
  • Year 2: $33,500 (small raise)
  • Year 3: $34,500 (more experience)
  • Year 4: $35,500

Total foregone wages: about $136,500 over four years.

(In reality your wage trajectory might be flatter or steeper depending on the job. We're using a modest 1.5% annual real raise.)

Total cost of college

Visible cost + opportunity cost = $96,800 + $136,500 = $233,300.

Notice: the opportunity cost is larger than the visible cost. For a typical Millbrook State student, the foregone earnings are bigger than the tuition. This pattern is true for almost every undergraduate program at almost every school for almost every student. The price tag is roughly half the real cost.

Does scholarship aid change this?

Suppose you receive a $5,000/year merit scholarship that covers half your tuition. Does that make college "free" or "cheaper"?

Yes — but only by the scholarship amount. Your visible cost goes from $40,000 in tuition to $20,000. Your total cost goes from $233,300 to $213,300. That's still an enormous number, and the foregone wages haven't changed at all. A scholarship reduces the price tag but not the opportunity cost. Many students and parents miss this.

There's a deeper version of the same point: even a full ride — every dollar of tuition, room, board, and books covered by scholarship — would still leave the foregone-wages opportunity cost intact. A "free" college is not free. It is just cheaper. The honest framing is: you are choosing to spend four years in school instead of four years in the workforce, and the cost of that choice is the difference between what you would have earned and what you do earn (which is usually approximately zero during college).

Computing the benefit

Now the other side of the ledger. What does a college degree get you?

The earnings premium

The cleanest way to measure the financial benefit of college is to compare the lifetime earnings of college graduates to the lifetime earnings of high school graduates. The most recent data from the U.S. Census Bureau (American Community Survey, 2022) shows that the median bachelor's degree holder earns roughly $32,000 more per year than the median high school graduate, in their prime working years (ages 25–64). Over a 40-year career, that's about $1.28 million in additional earnings.

That number is dramatic. But it has to be interpreted carefully.

First, it's a median. The variance is enormous. A college graduate in petroleum engineering or computer science earns much more than a high school graduate. A college graduate with a degree in some less-financially-rewarded fields, in some labor markets, may not see a premium that large. The variance matters for individual decisions.

Second, it's a correlation, not a causal estimate. People who go to college are different from people who don't, in ways other than just the degree (motivation, family resources, geographic location, prior academic preparation). The honest causal estimate of the college earnings premium — how much more a particular high school graduate would earn if they decided to go to college — is somewhat smaller than the raw correlational number, but it's still positive and large for most students.

Third, it's measured at the median, not at the marginal student. The "marginal student" — the person who is genuinely on the fence about whether to go to college — gets a lower return than the average student, because the average student is more committed and more prepared. We will revisit this distinction in much more depth in Chapter 36.

For the rough calculation, let's use a conservative number: $20,000 per year in additional earnings, for 40 years of working life, starting at age 22. That's $800,000 in additional lifetime earnings.

The non-financial benefits

The earnings premium is not the only benefit, and it might not even be the most important one for most students. Other things college tends to provide:

  • Knowledge and skills. You learn things you would not have learned otherwise. Some of this is directly useful (specific technical skills); some is indirectly useful (critical thinking, writing, the ability to learn new things).
  • Social and professional network. Your classmates, professors, and alumni become a network you can draw on for the rest of your life.
  • Credentials. Many jobs are gatekept behind a bachelor's degree, even when the degree is not strictly necessary for the work. Having the degree opens doors.
  • Health and life expectancy. College graduates live longer, are healthier, and report higher life satisfaction on average. (Causal interpretation is again contested.)
  • Personal growth. For many students, college is the place where they figure out who they are and what they want. This is a benefit that's hard to put a dollar value on but that most college graduates would say is real.

These non-financial benefits are real even if they don't appear on a balance sheet. A complete cost-benefit analysis of college should include them.

The downside risks

College is not a guaranteed win. Things that can go wrong:

  • You don't graduate. About 40% of US students who start a four-year college do not finish within six years. If you don't finish, you typically pay much of the cost (tuition for the years you attended, foregone wages for the years you were in school) without getting most of the benefit (the degree credential).
  • You graduate but the labor market is bad for your degree. Some majors and some moments in time produce college graduates who struggle to find work matching their qualifications. Underemployment is real.
  • You take on debt that constrains future choices. Student debt averages about $30,000 per borrower at graduation; some students borrow much more. Debt limits flexibility and can affect decisions about where to live, what to study, whether to start a business, when to have children.

For a typical student at a typical school, the expected value of college is positive. For some students at some schools, it's not. The economic question is not "should every 18-year-old go to college?" but "for this student, given their situation, is college the highest expected-value option?"

The decision

Comparing the $233,300 cost to the $800,000 earnings premium (plus non-financial benefits, minus downside risks), the math comes out favorably for college on average. But your decision should not be based on the average. It should be based on your situation.

Some questions to ask yourself:

  1. What are the realistic alternative paths? Is the $33,000/year job actually available to you, or is it harder to find than the textbook number suggests?
  2. How likely are you to graduate? Honestly. If your situation makes graduating in four years uncertain, the expected cost rises sharply.
  3. What major and career are you considering? The earnings premium varies by major. The variance matters.
  4. Can you afford the visible cost without taking on burdensome debt? If not, what is the marginal cost of debt itself?
  5. What non-financial benefits do you specifically value? Network? Knowledge? Personal growth? The chance to leave home for four years?

There is no single right answer. The economic framework gives you a structured way to ask the question.

A note on the framing

You will hear both of these claims, often from the same people:

  • "College is worth it. The earnings premium is huge. Of course you should go."
  • "College is a scam. Tuition is unaffordable. Student debt is crushing. Don't go."

Both claims are exaggerations. The truth is more nuanced. College has positive expected value for most students at most schools — particularly for students who graduate, particularly in fields with strong labor markets, particularly when affordable. It does not have positive expected value for every student at every school in every situation. The economic question is which case applies to you.

Don't let people who treat their answer as universal tell you what your decision should be. Apply the framework. Ask the questions. Decide for yourself.

Discussion questions

  1. Compute the cost of your own college (or hypothetical college) using the framework above. Is your total cost similar to the $233,300 figure, or different? Why?
  2. The case study uses a 1.5% annual real raise for the wage trajectory of someone working instead of going to college. Is that realistic for the kind of jobs available in your area? What would the calculation look like with a different assumption?
  3. Of the non-financial benefits of college, which do you personally value most? Which least?
  4. Of the downside risks, which worries you most?
  5. Suppose you knew with certainty that your post-college job would pay exactly the same as your no-college job. Would you still go to college? Why or why not?
  6. Some economists have argued that the "earnings premium" of college is largely a signaling effect — colleges identify smart, motivated, hardworking students and credential them, but the actual learning that happens at college contributes less than the credential. If this is true, what does it imply for the cost-benefit calculation? What does it imply for someone who could graduate from a less-expensive school?