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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
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