Liberty Street Economics

« | Main | »

September 3, 2014

Staying in College Longer Than Four Years Costs More Than You Might Think

Jaison R. Abel and Richard Deitz

This post is the second in a series of four Liberty Street Economics posts examining the value
of a college degree

In yesterday’s blog post and in our recent article in the New York Fed’s Current Issues series, we showed that the economic benefits of a bachelor’s degree still outweigh the costs, on average, even in today’s difficult labor market. Like others who assess the value of a bachelor’s degree, we base our estimates on the assumption that a student takes four years to finish the degree. But it is not uncommon for people to take longer than that. In fact, recent data indicate that among those who complete a bachelor’s degree within six years, only about two-thirds finish in four years or less. What does it cost to stay in college for a fifth or sixth year before finishing that degree? Perhaps more than you might think.

How should we measure the costs of taking an extra year or two to complete a bachelor’s degree? The most obvious cost is the extra tuition and fees that must be paid (room and board are not really an extra cost from an economic perspective, since they have to be purchased regardless of whether one is in school). In our recent article, we showed that the average net tuition cost—which reflects what the average student actually pays out-of-pocket when various forms of aid and tax benefits are taken into account—is a little more than $6,500 per year. However, in economic terms, tuition is only a small part of the extra costs incurred for that fifth or sixth year of school. There are also opportunity costs to consider, and these add up in ways that may not be obvious at first glance.

First, students who spend an extra one or two years in school as a full-time student incur an opportunity cost in the form of forgone earnings. Economists measure this cost as the wages one could have earned with a college degree had one graduated a year or two earlier. Second, entering the job market a year or two late damages students’ lifetime earnings profile. In addition to giving up one or two years of college-level earnings while in school, students miss out on a year or two of experience and the extra push that gives their wages over their working life.

While we don’t directly observe people who graduate in five or six years, we can use our analytical framework to simulate what the added costs would amount to, based on the average wages of college graduates in general. Using our estimates, we determine that someone who finishes a bachelor’s degree in four years would earn, on average, about $37,500 their first year on the job. By the time that person reaches the age of twenty-five, they earn an average of about $45,500, having racked up a few years of experience and commensurate raises. If we assume that a five- or six-year graduate follows the same earnings path but starts working a year or two later, we find that a five-year graduate would earn $43,000 at the age of twenty-five ($2,500 less than a peer who graduated in four years), and a six-year graduate would earn only about $40,000 ($5,500 less). This earnings “wedge” persists throughout one’s career. The differences add up each and every year, so that those graduating later never really catch up to those who graduated earlier.

In the table below, we use the 2013 lifetime earnings profiles from our article to estimate the costs of taking an additional year or two to complete the bachelor’s degree. All in all, an extra year of staying in school costs more than $85,000, and for those who take two extra years to finish, it costs about $174,000. The net present value of these totals, using a 5 percent discount rate, yields a cost of about $65,000 for each additional year spent in school.


Alternatively, we can look at how the return to a bachelor’s degree declines as time to completion increases, as shown in the chart below. Using 2013 data, we estimate that the rate of return for the average student who finishes the degree in four years is about 14 percent. That figure gets shaved down to about 11 percent for a five-year completion, and to 8 percent for six years. Overall, the rate of return plummets by 40 percent for the six-year plan compared with the traditional four-year plan.


The upshot of our discussion? For students who require five or six years to graduate, the value of a bachelor’s degree no doubt remains substantial, but staying on in college certainly takes a financial toll.

The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.


Jaison R. Abel
is an officer in the Federal Reserve Bank of New York’s Research and Statistics Group.

Richard Deitz is an assistant vice president in the Bank’s Research and Statistics Group.


Feed You can follow this conversation by subscribing to the comment feed for this post.

I read with interest your recent article and appreciate the research behind it. Perhaps you would consider publishing the results for a graduate who earns a bachelor’s degree, but chooses at some point to step out of the workforce to raise a family – 6 years, 16 years? – then re-enters.

Presumably at every point in the college career there’s a risk of dropping out. How many college dropouts are there compared to the people who finish in 4 years or 6? Can you estimate the return to spending time in college without earning a degree? At what point might the expected net return to an additional year become negative?

The comments to this entry are closed.

About the Blog

Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.

The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Asani Sarkar, all economists in the Bank’s Research Group.

Liberty Street Economics does not publish new posts during the blackout periods surrounding Federal Open Market Committee meetings.

The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.

Economic Research Tracker

Image of NYFED Economic Research Tracker Icon Liberty Street Economics is available on the iPhone® and iPad® and can be customized by economic research topic or economist.

Economic Inequality

image of inequality icons for the Economic Inequality: A Research Series

This ongoing Liberty Street Economics series analyzes disparities in economic and policy outcomes by race, gender, age, region, income, and other factors.

Most Read this Year

Comment Guidelines


We encourage your comments and queries on our posts and will publish them (below the post) subject to the following guidelines:

Please be brief: Comments are limited to 1,500 characters.

Please be aware: Comments submitted shortly before or during the FOMC blackout may not be published until after the blackout.

Please be relevant: Comments are moderated and will not appear until they have been reviewed to ensure that they are substantive and clearly related to the topic of the post.

Please be respectful: We reserve the right not to post any comment, and will not post comments that are abusive, harassing, obscene, or commercial in nature. No notice will be given regarding whether a submission will or will
not be posted.‎

Comments with links: Please do not include any links in your comment, even if you feel the links will contribute to the discussion. Comments with links will not be posted.

Send Us Feedback

Disclosure Policy

The LSE editors ask authors submitting a post to the blog to confirm that they have no conflicts of interest as defined by the American Economic Association in its Disclosure Policy. If an author has sources of financial support or other interests that could be perceived as influencing the research presented in the post, we disclose that fact in a statement prepared by the author and appended to the author information at the end of the post. If the author has no such interests to disclose, no statement is provided. Note, however, that we do indicate in all cases if a data vendor or other party has a right to review a post.