The Financial Value of a College Degree
According to recent research from the Federal Reserve, college graduates can expect a median annual return of 12.5% on their investment in higher education. This figure is significantly higher than the long-term returns typically seen in the stock market. The financial benefits of a college degree are also evident in the earnings gap between graduates and those with only a high school diploma. On average, college graduates earn $32,000 more annually than their peers without a degree, a premium that has reached near all-time highs.
Despite rising student loan debt and fluctuating stock market performance, many Americans are questioning whether a college degree is still worth the investment. However, researchers at the Federal Reserve Bank of New York, Jaison R. Abel and Richard Deitz, argue that college remains a valuable investment for most people. Even though some recent graduates may struggle to find good jobs, they are generally in a better position than similarly aged workers without a college degree, who often face higher unemployment rates and lower wages.
College as a Blue-Chip Investment
Abel and Deitz’s research highlights that the financial return from a college degree surpasses traditional investment benchmarks. Their study found that, even when accounting for opportunity costs—such as the income forgone during years spent in school—the median lifetime return for a college graduate is 12.5% annually. This rate makes higher education a strong financial investment, even when compared to the S&P 500, which has historically provided long-term real returns of under 7%, and bonds, which have averaged less than 2% annually.
The consistency of the college wage premium over the past three decades is a key factor in this value. While college costs have increased, so have the financial benefits. This has led to headlines suggesting that the rate of increase has leveled off, sometimes using terms like "stagnation" to imply negative trends. However, the data shows that the college wage premium has remained remarkably high, with median college graduates earning about 70% more than those without a degree. This advantage has not been expected to grow year after year indefinitely.
The Wage Premium and Economic Trends
The wage premium for college graduates has increased over time due to several factors. Wages for those with only a high school diploma have declined significantly since the early 1970s, while salaries for college graduates have risen by about 5% over the same period. Other studies support these findings. A 2025 study from the Federal Reserve Bank of San Francisco estimated the college wage premium at around 75%, and a 2024 study from New York University found that earning a degree had an annualized rate of return of about 10% for women and 9% for men.
AI and the Job Market
Recent concerns about artificial intelligence (AI) displacing college graduates have sparked alarm in the job market. However, Abel and Deitz remain skeptical about the widespread impact of AI on recent graduates. They note that weakness in demand for computer science graduates has existed for years before AI became widely accessible. Instead, they point to broader economic factors, such as a cooling labor market and sector-specific challenges, as more likely causes of job market fluctuations.
The Real Cost of College
Contrary to popular belief, the out-of-pocket costs of college have actually decreased in recent years. In 2024, the average published tuition at four-year colleges was around $21,000 per year. However, students received nearly $15,000 in grants, aid, and tax benefits, reducing the average net price to about $30,000 over four years. The biggest cost of college, according to the Federal Reserve, is not tuition or books but the opportunity cost—the wages lost while attending school.
When the Investment Doesn’t Pay Off
While the overall return on a college degree is strong, it depends on several factors, including the major chosen and the time taken to graduate. Graduating in five or six years can significantly reduce the return on investment. For example, taking five years to complete a degree lowers the median return to about 9%, and taking six years pushes it down to 7%. These figures reflect not just additional tuition costs but also the impact of delayed career entry and missed opportunities for advancement.
According to the Fed's analysis, about a quarter of college graduates do not see significant financial benefits from their degrees. However, for the majority, higher education remains one of the most reliable pathways to economic mobility.
The Bottom Line
While stock market investments can offer high returns, they come with uncertainty and require careful timing. In contrast, higher education provides a more stable and predictable financial return. Historically, it has been a powerful tool for working-class families to achieve middle-class stability and beyond. As the data shows, a college degree continues to be a wise investment for most individuals, despite the challenges and evolving economic landscape.