To some observers, the value of tertiary education and, indeed, all levels of education cannot be truly measured. Education serves a wider social purpose and so the measure of its costs and benefits may be less important than the belief that education is a good thing. Thus, individual and social investment in education is, ultimately, an act of faith.

This is a view that the author subscribes to. The purpose of this paper, however, is to measure from a student’s point of view their perception of the value of their education. This is a factor in determining their participation in university programs. Education is an important national objective for almost all societies and it is generally agreed that there are significant externalities for society as a whole generated by increasing levels of participation in university programs. Therefore, it is important to determine the perception by students (and, by extension, their families) of the value of their education since this will, in part, determine enrollment levels.

Students do have a sense of the value of their education. They have a sense of what they are gaining and losing during their university years.

Students in the Carleton School of Architecture come from all parts of Canada and they are joined by foreign students from overseas who make up a significant part of undergraduate enrollment (around 15%).

Students, in this non-scientific poll we conducted, are in their second, third and fourth years and typically range from 21 to 30 years of age. They are mature persons with firmly held beliefs. They are highly motivated individuals. Their sense of the value of their education is partly based on their perception of what they expect to earn as architects versus what they would have earned without their degrees. It is most often based on the difference between what they would have earned as an architect as compared to a technical position; they are, in most cases, not comparing their futures as architects with, say, a future as burger flippers.

Students generally have a quite accurate picture of their costs: tuition, extra travel, books and supplies. These are costs that they would not otherwise incur if they were in the work-a-day world instead of studying. They also have an understanding of how much they would earn if they were in a job instead of at school.

Further, the author has found that his students have a sense of their own personal discount rates. The author has measured this by administering a brief test. The students are asked to loan their professor (in theory only) a meaningful amount of money ($1,000) for a year. No interest payments are made. After 12 months, the students get their principal back with an interest kicker. How much does this ‘kicker’ have to be before the students will part with their money? The ‘kicker’ is raised in increments of $50. When students feel that the amount is high enough, they so indicate.

The results in our non-scientific poll suggest a student discount rate of about 23% per annum. Prima facie, this tends to make sense- students are not inclined to part with their money without the promise of a substantial return. Students and young people generally place a high value on cash in their jeans as opposed to a promise of future returns. One may assume that as they grow older, their personal discount rates may decrease somewhat but one can usefully conclude from this data that immediate gratification plays a significant role in the decisions taken by young people.

If the perceived rate of return on their education is found to be less than their personal discount rates, how do they justify their investment in their education? There is evidence in our data that a high percentage of students also place a non-monetary value on their education: just under 84% of the respondents indicated thusly. They feel that continuing their education provides them with other benefits such as expanded consciousness, quality of life improvements or less likelihood of periods of unemployment.

Also, we found that a greater use by students of OPM (other people’s money) in the form of student loans and parents’ funds leads to a greater willingness to enroll in the program. Student loans are interest free and require no principal payments while the student attends university. With a personal discount rate of 23%, the typical student looks at student loans as near to ‘free’ money. A student with a personal discount rate of 23% pa., who obtains $35,000 of student loans during a five year architecture program and begins repayment after graduation, places a present value on the student loans of just $12,432. The results of the survey suggest that few of the Carleton students surveyed would place a lifetime value on their degree of less than $12,500.

The survey took place in calendar years 1997 and 1998. Eighty-five questionnaires were distributed to students by students in the Real Estate Development class. We received 58 responses.

The sample size of 58 is a significant proportion of the total number of undergraduate students enrolled in the program (292 in 1997/98). The 16 question survey was designed to measure the perceived value (from a student’s point of view) of an undergraduate degree in architecture for students enrolled in the Carleton University program.

Students were told that to help us in our research into the value of education, we needed to obtain a comparison between the ‘earnings of Architecture Graduates, with what they would otherwise earn...’. They were also told that we need to ‘ascertain what typical student costs are while at the University’. Students were assured of complete confidentiality.

Question 1 asked each student what they would be doing if they were not studying in the School of Architecture. Included in the multiple choice answers was ‘a) lying on a beach’. The purpose of this was to determine if respondents were expecting to engage in non-commercial activities during these years of their lives if they were not studying (only one respondent was in this category).

We also included a veracity test in the questionnaire. This test demonstrated that there was internal consistency in the survey results.

The survey did not include a question as to how much ‘free’ financial support was obtained by the students from parents or family or other sources. The survey attempted to measure only the amount of student loans. The thinking behind this was to treat money from parents or other family members as if it were the students’ own. In the event that they did not obtain this support for their studies, the assumption was that they would benefit from these funds in some other way (for example, by way of assistance in purchasing a first car or home). So the money expended was, in fact, theirs. Other researchers may wish to extend this work by taking the opposite view.

Q12 measured the amount of student loans each student has obtained or expected to obtain. 36 students out of 58 respondents obtained or expected to obtain a total of $33,143 in student loans by the time of graduation. The other 22 students either expected to have no student loans or did not respond. For the purposes of this calculation, we did not average down the results.

We first looked at the rate of return on investment in education on the basis of a student with no student loans (Case A). Each dollar invested in education was treated as equity, either cash in or money not received from employment. In Case B, we looked at a student profile based on binary decision tool- if students did receive student loans, the average amount was approximately $33,000 (or $6,629 per year on average for five years). This all or nothing (0 or 1) treatment of student loans means that, where student loans are incurred, the equity invested in education is reduced by $6,629 annually for each of the five years of the program. As we will see, the favorable financial terms of the Canadian student loan program increases the internal rate of return on equity of a university education when compared to students who do not participate in this government supported program. From the point of view of the student group, the rate of return is actually somewhere in between.

If family support was equivalent to student loans for the other non reporting students, then the Internal Rate of Return (IRR) of education is further boosted (see Case C). However, this could be construed as a bogus calculation since the ‘free’ money provided by family has an opportunity cost associated with it (at least, as far as the parents are concerned) and, indeed, may have an opportunity cost to the student as well if these are funds that they would otherwise obtain from their families for other purposes.

We used the internal rate of return to measure the value of education. The IRR is the interest rate at which future earnings (the difference between earnings as an architect and earnings in alternative employment sans degree minus student loan repayments, if any) can be discounted to today’s value such that they are exactly equal to the investment in education discounted using the same interest rate. Investment in education was measured by adding tuition, travel, books and supplies costs to expected earnings lost from not being in full time alternative employment and deducting actual earnings from part time work.

Private sector firms target return on equity in the 14% to 22% range with most looking for 18% to 22% p.a. With discount rates this high, events that occur after 20 years tend to have a small impact on rates of return. In this example, we have used a rate of 12% p.a. to discount net benefits over the 20 to 39 year time period. The discounted value of additional earnings (in the amount of $474,400) was added to the net benefits of year 19. We used a 12% personal discount rate because we felt that it was compatible with the lowering of personal discount rates as people age.

Including earnings from the latter stages of a career had a significant impact on the rate of return on investment in education, as we will see in one of our sensitivity tests. Our model shows an increasing net benefit is derived from education as time passes; so despite substantial discounting, the later years have a significant impact on estimates of the value of education. It truly is a lifetime investment in human capital.

Tabulating our data from the survey yields average results as shown below for the costs (including opportunity costs) of attending the University in the Architecture Program.

The average offsetting revenues (from part time work while attending university) and average salary expectations after graduation are shown below.

From the above data, it is possible to calculate the rate of return on a student’s investment in a degree in Architecture from Carleton University over their career.

For students with no student loans and with the above profile, their IRR is 13.4% per annum (Case A).

For students who have student loans at Carleton in the School of Architecture, their average

amount of student loans (a mix of actual and expected numbers) is $33,143 upon graduation or an average of $6,629 per year of debt. Thus, we reduce their equity investment by this amount in years one to five and add principal and interest repayments after graduation. The average expected interest rate on these loans is 7.4% and the average time of repayment is nine years (this works out to annual payments of $5,002 for nine years).

The use of student loans increases student rates of return on their education to 14.4% (Case B).

If parents give students the money equal to student loans with no repayment expectations, the student’s IRR increases yet again to 16% (Case C).

If we restrict our analysis to 20 years and ignore the balance of their careers, IRR drops to just 9.2%.

If parents pay all tuition, books, supplies and travel costs, the student’s IRR is 16.1%. Our survey shows that there is a very close correlation between these hard costs (books, supplies, extra travel and tuition costs) and the total average amount of student loans. This raises the confidence we have in the survey results.

The author was somewhat surprised to find the IRR of education to be significantly below student personal discount rates. This finding has some important policy implications for governments, higher education institutions and parents.

There appears to be no better predictive measure of the performance of a nation state’s economy than the proportion of the population with tertiary education. More persons with university level education and more knowledge workers are important determinants of future prosperity, more so than, say, ownership of natural resources.

These facts are supported by the increasing divergence between the earnings of university educated persons and those without a college degree. The value of a degree is known by young people- the percentage of high school graduates enrolling in college has increased in the USA from 52% in 1970 to 66% today. We can hope that similar trends are occurring in Canada as well.

Has the increase in enrollment experienced in the USA occurred in the face of an IRR of education below personal discount rates there? One would suppose that the IRR of architecture education in the United States might be lower since tuition and other costs associated with attending university there are substantially higher than comparable Canadian universities. However, salaries for professionals also tend to be higher in the USA so we are unable to come to any kind of informed speculation about rates of return there.

It is also possible that students everywhere are deciding to attend university to obtain professional degrees in greater numbers because they fear that, without a higher degree, they will be left further behind as the divergence in incomes become more pronounced. They may also fear disruption in income in future years since joblessness in lower skilled occupations is generally higher

Certain countries appear to recognize the fact that students need encouragement to attend university. Australia and France make tertiary education available to qualified students who are citizens for free. Young people have very high personal discount rates- certainly higher than the IRRs shown here. They place a very high value on immediate gratification. They enjoy the benefits of immediate employment such as owning a car, living independently from parents and so forth. Anecdotally, males appear to have even higher personal discount rates and even less tolerance for a four or five year wait for a ‘real’ pay check. Perhaps that is, in part, why relatively fewer males and relatively more females are enrolling at universities.

In any event, there can be no doubt that investment in human capital has both individual benefits and significant externalities for society as a whole. The numbers suggest that parental and family financial support for university bound high school students is crucial to the decision making process of young people. Parents and governments have their responsibilities to extend support whether it is ‘free’ money, student loans, reasonable or zero cost tuition, bursaries and scholarships. By extending these initiatives, they are increasing the personal rate of return on education to something closer to the student’s personal discount rate. However, even with ‘free’ education, only those young people who are highly motivated and willing to defer gratification for a number of years will attend university- the determination to succeed still must come from within.

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