Return on education and perceived rationality in pursuing

higher education

Presenter: Sailesh Acharya

Objective of this presentationIn wake of student loan crisis, what can be a

possible solution? Bring the findings of research study that focuses

on providing information that can be a solution. Does it work? Where can this study be applied?

Why research needed? Attending college: an aspiration

Family/societal norm Undergraduates earn twice as much as High School graduates

US Dept of commerce

Unemployment rate (2013): 7.5% for High School graduates 4% for Bachelor’s degree 2.3% for Graduate degree (BLS)

Rising cost of education: By 40% for public institution (NCES)Outstanding student loan debt: $1.19 trillion (Fed Reserve

Bank of NY)National CDR: 13.7% (FY 2011) (Federal Student Aid)

Why research needed?Looking from the lens of education as an investmentDo students and parents weigh cost and benefit?

Research by Brown Center on Education Policy says ‘no’Efforts made

Higher Education Opportunity Act, 2008

Students unaware of the informationQuestion: Information perceived rationality of

attending college? Fill the gap in the literature.

Theoretical foundationEducation as an investment

Rational choice Investment: if the anticipated outcome will maximize

utility (applies to any capital) In human capital: education is the investmentReturn on education quantifies the expected utilityThis notion is foundation of independent variable.

Theoretical foundationHuman Capital Theory (Schultz, Becker, Mincer)

Educational investment for pursuing higher education

People invest in higher education if return on education > cost of investment.

Discounted long-term income benefits > all direct cost + forgone earning for higher education.

Makes sense: Age, Cost of college education, Earning

Theoretical foundation Limitation of HCT

Based upon own cognition Societal structure

Social Cognitive Theory (Bandura) Educational context

Draw information from other sources to make value judgment Role of parental influence and personal experiences Socio-structural factors: socioeconomic status, educational

structure.

Anchoring (Tversky & Kahneman) Mental shortcut Cognitive bias where an individual adjusts final answer based upon

the initial piece of information.

Return on Education

Cost of college

attendance

Age

Human Capital Theory

Forward-thinking attitude

Educational Context (Social Cognitive

Theory)

Own level of

education

Parent’s level of

education

Aspiration of

educationFamily Income

Perceived prudence

of educationa

l attainment

Perceived prudence

of educationa

l attainmentReturn on

Education

Cost of college

attendance

Age

Human Capital Theory

Educational Context (Social Cognitive

Theory)

Family Income

Aspiration of

education

Research question

Quantifying the return on education or even manipulating the information, whether an individual will consider the higher education attainment as prudent or not.

Hypothesis H1: Young adults will value the perceived prudence of education

more than the older adults. H2: The cost of college education will have an influence in the

perceived prudence of education H3: The higher return on education will result in higher perceived

prudence of education. H4: Parent’s level of education will have a positive influence in

the perceived prudence of education. (Omitted because of bias) H5: An individual’s aspiration of education will have a positive

influence in the perceived prudence of education. H6: Family income will have a positive influence in the perceived

prudence of education.

MethodologyDataset information

Collected data using Survey Sampling InternationalMulti-state research team- Behavioral Economic and

Financial Decision-Making and Information Management Across the Lifespan (NC-2172)

N = 2158After cleaning the data, N= 1917

MethodologyExperimental designRandom assignment in 2 groups: experimental

and control6 experimental and 2 control groups

Treatment: information on return on educationMeasuring dependent variable: Perceived

prudence of educational attainment

Dependent VariablePerceived prudence of educational attainment

Do you think it is wise for [subject] to take student loans in order to pursue a college degree? Answer choices: 1. Not wise

2.3. 4. 5.Very Wise

Independent Variables- DemographicsAge

Ordinal level18-24 years, 25-34 years, 35-44 years, 45-54 years,

55-64 years, 65 years and over

RaceCategoricalWhite, Black, Hispanic, Asian and others

GenderMaleFemale

Independent Variables Cost of college attendance

What is the typical 1-year cost of attendance at your state university? Costs include tuition, housing, and dining.

Ordinal: $1-$9,999, … $50,000 or more. Important thing: anchoring

Return on education (treatment) Example, “On average, an individual whose highest education level is a

high school diploma will make $1,912 less per month than someone who has a bachelor’s degree” The average salary is higher for those with college degrees than with high

school diplomas The average salary is higher for those with high school diplomas than with

college degrees Understood correctly Didn’t understand Control

Independent VariablesAspiration of education

How important is a college degree? Scale: 1 (not important) to 5 (very important)

Family incomeWhat is your combined annual household income? Ordinal level (15 categories)From under $20,000 to $150,000+

Perceived prudence

of attaining college

(rational choice)Return on

Education

Cost of college

attendance

Age

Human Capital Theory

Educational Context (Social Cognitive

Theory)

Aspiration of

education

Family Income

Bivariate AnalysisCrosstabs (contingency tables). Why?

Looks at dependent variable decomposed by all the explanatory factors.

Age: Showed no significance. Why?

Race No Significance

Gender No Significance

They’ll be used as control variables for higher level analysis

Return on EducationSignificant

a. Chi(df)= 27.39(8), p = 0.001

Bivariate Analysis

Bivariate AnalysisCost of college attendance

Significant (χ2=69.23, p<.001) Percentage of individuals considering college attainment as

very wise increased with 1-year estimated cost of college attendance. Effect of anchoring.

Aspiration of education Significant (χ2=502.04, p<.001). Percentage of individuals considering college attainment as

very wise increased with those who considered degree attendance as not important to important.

Family Income Significant (χ2=142.979, p<.001).

Multinomial Logistic RegressionWhy?

To calculate the odds of group membership. Dependent variable is categorical with 3 categories:

Not wise, indifferent and Wise. Research question.

What does it do? Calculates predicted odds of being a member of one group

of a dependent variable based on the membership of the independent variable.

2 things to understand Predicted odds Group membership: Wise vs. indifferent and Not wise

vs. indifferent. (dependent variable)

Result: Multinomial Logistic RegressionAge, race and gender showed no significance.

Multinomial Logistic Regression

Return on educationThe predicted odds of considering higher education

as wise rather than indifferent is 94.4% higher for those who understood the information than who did not understand the information.

Perceived prudence

of attaining college

(rational choice)Return on

Education

Cost of college

attendance

Age

Human Capital Theory

Educational Context (Social Cognitive

Theory)

Aspiration of

education

Family Income

One level significance, Level 2: p<.05

No significance both levels

One level significance, Level 2: p<.05

Both level significance, Level 1:p<.001 Level 2: p<.001

Both level significance, Level 1: p<.001 Level 2: p<.001

Hypothesis: H1: Young adults will value the perceived prudence

of education more than the older adults.No support for hypothesis at both levels.

H2: The cost of college education will have an influence in the perceived prudence of educationSome support for hypothesis with one level

significance.

H3: The higher return on education will result in higher perceived prudence of education.Some support for hypothesis with one level

significance.

H4: Parent’s level of education will have a positive influence in the perceived prudence of education. (Omitted because of bias)

H5: An individual’s aspiration of education will have a positive influence in the perceived prudence of education.Strong support for hypothesis with both level significance.

H6: Family income will have a positive influence in the perceived prudence of education. Strong support for hypothesis with both level significance.

Hypothesis:

Discussion: Understanding the information regarding return on

education is crucial for the value judgment of educational attainment.

People apply mental shortcuts to rationalize the value of college attainment – seen through cost of college attendance.

An individual’s aspiration of education is crucial for perception of higher educational attainment.

Family income also plays an important role in perceiving higher education as prudent.

Implication:Researcher: Wide range of research possibilities.

Total amount of student loans? Kind of college major? Career choice? Influence of heuristics?

Policy makers: To convey the message in a way the audience understands the information provided to make an informed decision. Is it accessible? Is it understandable?

Household: To make household decision on financial planning of themselves or their children, start saving early, career choice, selection of college major, whether or not to take student loans.

References Bandura, A. (2001). Social cognitive theory: an agentic perspective. Annual review of psychology. 52: 1-26.

Becker, G.S. (1965). A Theory of the Allocation of Time. The Economic Journal, 493-493.

Brown Center on Education Policy at Brookings (2014). Are College Students Borrowing Blindly? Washington, D.C.: Author.

Gutter, M., Hayhoe, C., DeVaney, S., Kim, J., Bowen, C., Cheang, M., Cho, S., Evans, D., Gorham, E., Lown, J., Mauldin, T., Solheim, C., Worthy, S. & Dorman, R. (2012). Exploring the relationship of economic, sociological and psychological factors to the savings behavior of low-to-moderate income household. Family and Consumer Sciences Research Journal, 41(1), 86-101.

Hout, M. (2012). Social and economic returns to college education in the united states. (pp. 379-400). PALO ALTO: ANNUAL REVIEWS.

Jepsen, C., & Montgomery, M. (2012, February). Back to school: An application of human capital theory for mature workers. Economics of Education Review, 31 (1), 168-178.

Perna, L. W., & Titus, M. A. (2005). The relationship between parental involvement as social capital and college enrollment: An examination of Racial/Ethnic group differences. The Journal of Higher Education,76(5), 485-518.

U.S. Department of Education. Federal Student Aid. (2014). National Student Loan Default Rates. Retrieved from http://www.ifap.ed.gov/eannouncements/attachments/2014OfficialFY20113YRCDRBriefing.pdf

Vaus, D. (2001). Research design in social research. London: SAGE.

Questions and comments

Without Aspiration

With Aspiration