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Is A College Degree An Insurance Policy?

This week's New York Magazine profiles a couple famous venture capitalists who have been publicly arguing that college is overrated. (Here's the article.)

After spinning through the usual discussion of high tuition prices and mediocre outcomes, the story poses an interesting question: What kind of economic good is college?

(Yes, there are lots of ways to think of college. Yes, I know it's not just an economic good. But given a cost that can easily reach well into six figures, the economic question is certainly fair game.)

Here are a few (non-mutually exclusive) options:

1. A luxury good

...college is a luxury good—a high-end commodity whose appeal, like a designer handbag, grows in direct proportion with the size of the sticker price.

As the Economist has noted, colleges don't compete to see who can offer the lowest sticker price. Instead, they compete on famous faculty and fancy facilities.

At the same time, colleges offer increasingly large discounts — grants and scholarships — off the full-tuition sticker price. (Here's a post on the growing gap between the sticker price and what students actually pay.)

2. An investment

...college is an investment — an expenditure on which one can expect high future returns

As we pointed out last fall, the income gap between people with college degrees and those with only a high-school diploma has exploded in the past 30 years. That means it makes more sense to think of college as an investment, so it's rational for colleges to charge more.

3. An insurance policy

This is the favorite model of Peter Thiel, one of the venture capitalists who is skeptical of the value of college.

Americans have become terrified, he says, of what will happen to their children if they don't send them to college. The recession, widening income inequality, growing job insecurity, the uncertain future of the welfare state, the increasing costs of health care—all have deepened the anxieties that made college such an attractive option for a rising middle class in the first place. "I think that's the way probably a lot of parents think about it. It's a way for their kids to be safe, to be protected from the chaos. You're paying for college because it's an insurance policy against falling out of the middle class." The larger question this raises, he says, is, "Why are we spending ten times as much for insurance as we were 30 years ago? And does that tell us something has gone really badly wrong with our country?"

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