The first principle is that you must not fool yourself, and you are the easiest person to fool.
Richard Feynman
In April 2025, the Federal Reserve Bank of New York published two reports on the return on a college degree.1 2 The first, “Is College Still Worth It?”, concluded the median college graduate earns a 12.5% annual return on investment, exceeding both stock market and bond returns. The second, “When College Might Not Be Worth It,” published the same week, found that at least a quarter of graduates earn returns of 2.6%, that six-year completers see returns fall to 7%, and that graduates in fine arts, liberal arts, leisure, and education earn returns far below the median.
The first paper made headlines. The second did not.
That asymmetry matters because the Federal Reserve occupies a unique position in the higher education debate. Georgetown is a research center. IHEP is an advocacy organization. The Federal Reserve is the central bank of the United States. When the NY Fed publishes a number, policymakers, lenders, financial advisors, and journalists treat it as settled. The 12.5% figure entered the national conversation with an authority the underlying methodology does not support.
The researchers are competent. The data sources are credible. The problem, as with Georgetown and IHEP, is what the analysis leaves out. The omissions are familiar by now. They start with understated costs, no taxes, and no discount rate. They extend further into how the Fed handles completion, how the Fed packages its findings, and what the Fed already publishes about graduate outcomes in another corner of the same building.
What the Fed Measured
The NY Fed calculates an Internal Rate of Return (IRR) by comparing the lifetime earnings of college graduates to those of high school graduates. The inputs:
The median college graduate earns $80,000 per year. The median high school graduate earns $47,000 per year. The Fed reports the annual premium at approximately $33,000, or 70 percent higher for the college graduate.1
Total costs are estimated at $180,000. The Fed arrives at this figure by combining direct costs ($30,000 over four years) with opportunity costs ($150,000 in forgone wages as a high school graduate during enrollment).1
The IRR, which equates the cost stream to the benefit stream over a 40-year career, comes out to 12.5%.
That number is real for the assumptions that produced it. The assumptions are the problem.
What the Fed Left Out
The Cost Understatement
The Fed calculates direct college costs at approximately $30,000 for four years. The arithmetic: average published tuition of roughly $21,000 per year minus average grants and aid of roughly $15,000, yielding approximately $6,000 to $7,500 per year in out-of-pocket tuition costs. Over four years, that produces the $30,000 figure.1
Room and board are excluded entirely. The Fed’s reasoning: students need to eat and live somewhere, whether or not they attend college, so housing and food costs are not incremental to the decision to attend college.1
That reasoning fails on two grounds.
First, the cost of campus housing and meal plans at most four-year institutions substantially exceeds the cost of living at home or sharing an apartment while working. The College Board reports average room-and-board charges of $12,000 to $14,000 at four-year institutions. A high school graduate living at home or splitting rent while working full-time faces materially lower housing costs. The difference is a direct consequence of the enrollment decision. Excluding it understates the true cost of attendance.
Second, the $30,000 figure uses average grant aid to reduce average published tuition. The distribution of aid is heavily skewed. Low-income students receiving maximum Pell Grants and institutional aid face costs near zero. Students from middle-income families, who represent the largest share of enrollees, often receive far less aid than the average suggests. The College Scorecard reports median net prices by income bracket, and the figures for families earning $48,001 to $75,000 often exceed $20,000 per year at four-year institutions, not the $6,000 to $7,500 the Fed’s average implies.3
The Fed’s own sensitivity test reveals the scale of the problem. When they nearly quadruple out-of-pocket costs from $30,000 to $112,000, the return falls from 12.5% to 9.2%.1 They present this as evidence the return is robust. It is actually evidence the cost assumption is doing most of the work. A fourfold increase in the largest input produces only a 3.3 percentage point decline in the output. The model is not robust. It is insensitive to cost, which means it is insensitive to the variable families need to evaluate most carefully.
Taxes
The Fed calculates returns using pre-tax earnings. The federal tax system is progressive. A college graduate earning $80,000 pays a substantially higher effective federal tax rate than a high school graduate earning $47,000.
In this book’s model, taxes shrink the after-tax gap between college and high school graduates relative to the pre-tax gap, by roughly $32,000 at the median (see Appendix B for the full NPV decomposition). That $200,000 is money the Fed counts as part of the college return but no graduate ever deposits.
An after-tax analysis narrows the wage premium by 20 to 25 percent. The 12.5% return is a pre-tax number applied to a decision families experience in after-tax dollars.
The Discount Rate Problem
The Fed uses the IRR rather than the Net Present Value (NPV) approach used in this book. The IRR is the discount rate at which the NPV of the investment equals zero. At first glance, 12.5% seems unambiguously strong. Earning 12.5% on any investment sounds like a good deal.
The problem with IRR is well known in finance. It assumes reinvestment of intermediate cash flows at the IRR itself. That means the 12.5% figure implicitly assumes every dollar of the wage premium earned along the way is reinvested at 12.5%. In practice, no individual reinvests their wage premium at 12.5%. They spend it, save it at prevailing interest rates, or invest it in a market returning 7 to 10 percent historically.
A modified IRR using a realistic reinvestment rate would produce a lower figure.
The deeper problem is what the Fed never calculates: the IRR of the alternative. The high school graduate who goes directly to work invests nothing. No tuition. No fees. No opportunity cost, because the opportunity cost is what you give up, and the high school graduate gives up nothing. From day one, every dollar earned is a positive cash flow on zero outlay.
IRR is the discount rate setting the NPV of all cash flows to zero. When the initial investment is zero and all subsequent cash flows are positive, the IRR is mathematically undefined. It is not 12.5%. It is not 20%. For zero dollars invested, any positive earnings stream produces a return approaching infinity.
The Fed compares its 12.5% to stock market returns (8%) and bond returns (4%). It never compares the college IRR to the return on the path the student is actually choosing between. Presenting 12.5% without the alternative’s return is like evaluating a stock’s gain without mentioning what else you could have done with the money. In this case, what else you could have done is earn a full salary immediately with no investment at all.
This is the strongest argument for why IRR is the wrong tool for evaluating college and NPV is the right one. NPV compares the two paths in the same currency: present-value dollars. It does not require both paths to have an initial investment. It simply asks what each stream of cash flows is worth today.
At a 7.8% discount rate, the median college graduate produces a lifetime after-tax NPV of $402,005 against the high school graduate’s $484,376. That is a negative return. Both analyses use Census Bureau and BLS earnings data. The difference is entirely in what the model includes and how it handles time.
The Completion Assumption
The Fed acknowledges the completion problem in a single sentence: estimates “apply to college graduates; those who start college but do not complete a degree incur at least some of the costs but enjoy far fewer benefits.”1
That sentence describes 39 percent of four-year enrollees. As Chapter 28 documents, students who do not complete their degrees carry debt without the wage premium. The median defaulter owes roughly $12,000 to $15,000 on a credential that never arrived. The 12.5% return applies only to the 61 percent who finish. The other 39 percent subsidize the headline number. They absorb the costs and disappear from the calculation.
A rigorous return figure would weight the graduate outcome by the probability of achieving it. Weighted for completion at 61 percent, and treating non-completers’ return as zero (which understates their actual loss), the expected return on enrollment falls to roughly 7.6%. That is before correcting for any of the other omissions. The expected return on enrollment is lower still once non-completer losses are factored in.
The Two-Paper Problem
The most revealing feature of the Fed’s analysis is not what either paper says. It is the decision to publish them separately.
Two papers. Same institution. Same week. The first got noticed. The second did not.
| Paper 1 · “Is College Still Worth It?” | Paper 2 · “When College Might Not Be Worth It” |
|---|---|
| 12.5% headline annual return for the median college graduate. | 2.6% return for at least the bottom quartile of college graduates. |
| Median college graduate earns $80,000. Median high school graduate earns $47,000. Pre-tax annual premium of $33,000. | For students who take six years to complete, the return falls to 7%. |
| Total cost estimated at $180,000 ($30K direct costs + $150K opportunity cost). | Graduates in fine arts, liberal arts, leisure, and education earn returns far below the median. |
| Returns exceed historical stock market (8%) and bond (4%) returns. | The 12.5% average is carried by graduates in engineering, math, computer science, business, and health sciences. |
| Cited by policymakers, lenders, financial advisors, and journalists as the settled answer. | Read by researchers who follow the Fed’s full publication stream. Not picked up in headlines. |
Source · Federal Reserve Bank of New York, April 2025. Both papers, side by side1 2
“Is College Still Worth It?” delivers the 12.5% headline. It travels. It gets cited. It reassures.
“When College Might Not Be Worth It” delivers the caveats. At least a quarter of graduates earn 2.6% returns. Six-year completers see returns fall to 7%. Fine arts, liberal arts, leisure, and education graduates earn returns well below the median. Engineering, math, computer science, business, and health sciences carry the average.2
These are not minor qualifications. They describe outcomes for millions of graduates. The bottom quartile, earning 2.6%, does not keep up with inflation in most years. The students choosing fine arts or education are not making irrational decisions. They are choosing fields with high social value and low financial return. The 12.5% average includes them and the engineers, presented as though both face the same investment.
Separating the optimistic and cautionary findings into two papers allows selective citation. The first paper stands alone in headlines and policy discussions. The second paper exists for researchers who read further. Most families making the decision at 18 will encounter the first number. Few will encounter the second.
The Underemployment Contradiction
The NY Fed maintains one of the most extensive data dashboards on college graduate labor market outcomes in the country. That dashboard, updated regularly, shows 42.5 percent of recent college graduates (ages 22 to 27) are underemployed, working in positions not requiring a college degree.4
That figure has not dipped below 38 percent in more than three decades of tracking.
For all college graduates, not only recent ones, the underemployment rate has held near 33 percent on average across the same period.4 One in three college graduates, at any point in their careers, works in a job not requiring the credential they paid for.
Consider what that means for the 12.5% return. The IRR calculation assumes the full wage premium persists across a 40-year career. The underemployment data, published by the same institution, shows a substantial share of graduates never access the premium the model counts on.
The 12.5% and the 42.5% come from the same building. They appear on different pages. They are never reconciled in a single analysis.
A graduate earning $47,000 in a job not requiring a degree is indistinguishable from a high school graduate in the Fed’s own earnings data. That graduate paid $180,000 (by the Fed’s conservative estimate) to reach the same salary the comparison group reached for free. The return on that specific investment is not 12.5%. It is negative.
What the Complete Model Shows
The inputs are not in dispute. Both the Fed’s analysis and this book’s model draw from the same Census Bureau and BLS earnings data. The median college graduate earns more than the median high school graduate. The wage premium is real.
The question is what happens to the return when you account for what families experience: after-tax earnings, realistic costs including the room and board differential, the time value of money, and the probability of not finishing.
This book’s model, fully documented in Chapters 29 and 31, produces a lifetime after-tax NPV of $402,005 for the median college graduate and $484,376 for the median high school graduate. The Fed says 12.5% return. The complete model says negative $82,371.
The Fed says 12.5% return. The complete model says negative $82,371. Same underlying data. Five variables make the difference.
| Variable | NY Fed’s treatment | This book’s treatment | Effect on the result |
|---|---|---|---|
| Wage premium | Median college $80K vs. median HS $47K. Pre-tax. | Same earnings data. Same source. | Same baseline (shared starting point, no divergence) |
| Direct costs | $30,000 total over four years (using average aid against average tuition). | Net price by income bracket. Middle-income families often face $20K+ per year. | Lower return |
| Room and board | Excluded. Argument: students must eat and live somewhere anyway. | Included as incremental cost. Campus housing exceeds living at home by $12K–$14K per year. | Lower return |
| Taxes | Pre-tax earnings used throughout. | After-tax earnings. The progressive federal tax system narrows the wage premium by 20–25 percent. | Lower return |
| Discount rate | IRR. Implicitly assumes reinvestment of wage premium at 12.5% itself. Never selects an explicit discount rate. | NPV at 7.8%, the cost of capital families actually face. | Lower return |
| Completion risk | Acknowledged in one sentence. Excluded from the calculation. The 12.5% applies only to the 61% who finish. | Weighted by 61% completion rate. The other 39% absorb costs without the credential. | Lower return |
| Headline output | +12.5% annual return | −$82,371 lifetime NPV (median college $402,005 vs. median HS $484,376) | Opposite conclusion |
Source · NY Fed, “Is College Still Worth It?” (April 2025)1 · This book’s full model in Chapters 29 and 31
Both analyses use median earnings. Both compare college graduates to high school graduates. The difference is five variables: the direct cost of attendance, room and board, taxes, a discount rate that reflects the real cost of capital and the time value of money, and completion risk. Remove any one of them and the college case improves. Include all five and it does not.
What This Means
Chapter 6 identified the pattern running through every major study of the College Wage Premium: researchers trained in labor economics apply their discipline’s tools to a question those tools were not designed to answer. The four studies examined in these appendices confirm that pattern in specific detail.
The Federal Reserve is not acting in bad faith. Neither is Georgetown. Neither is IHEP. The researchers are competent professionals. But their unit of analysis is the population, not the individual.
Their question is whether education increases earnings at scale. The family’s question is whether this degree at this institution at this cost will generate a return. Those are different questions requiring different tools.
The evidence across all four appendices is consistent.
No taxes. Economists study pre-tax earnings because they measure productivity. A financial analyst would never evaluate an investment without accounting for the tax treatment of the returns.
No discount rate, or an artificially low one. Economists measuring a wage gap at a point in time do not need to discount cash flows. When forced to discount, they reach for the risk-free rate because their method treats education as a macro-level good rather than a risky individual investment. The CEW used 2.5%, then 2%, then 0%. The Fed used IRR, which avoids selecting a discount rate at all.
No opportunity cost of the alternative, or an understated one. Economists compare groups: college graduates versus high school graduates. The group comparison does not require modeling the alternative path’s cash flows. The individual decision does. The Fed calculated the college graduate’s IRR at 12.5% and never calculated the high school graduate’s return on zero investment.
Aggregation to the median. Economists report medians because they are studying the population effect. A financial analyst would never tell a client the median stock returned 12.5% without disclosing the variance, the probability of loss, and the specific risk profile of the investment under consideration.
Completion risk acknowledged in passing and excluded from the calculation. Economists studying the wage premium study graduates, because graduates are the population exhibiting the premium. The 39 percent who do not finish are outside the frame. A financial analyst evaluating expected return would weight the outcome by the probability of achieving it.
The pattern is not conspiracy. It is not negligence. It is a discipline applying its own tools to a question those tools were not designed to answer, and an industry amplifying the results because the results confirm its preferred narrative.
When the Fed publishes a 12.5% return, the implicit message to families is: college is a good investment. When the same institution publishes a 42.5% underemployment rate, the implicit message is: the investment does not deliver for two in five graduates. Both numbers are real. Both are published by the same source. The 12.5% shapes decisions. The 42.5% does not, because it appears in a different report, on a different page, in a different month.
The data to evaluate college as an investment is public. The College Scorecard, IPEDS, the BLS, and the Census Bureau provide everything a student needs. What they do not provide is the methodology to assemble those inputs into an honest answer.
The studies in these appendices applied the methodology of economics. The model in this book applies the methodology of finance. The data is the same. The questions are different. The answers are different. The methodology is documented. The assumptions are stated. The tool is live at collegeroi.org. Substitute your own inputs and rerun if you disagree.
The appropriate response to the Fed’s 12.5% is not to reject the data. It is to apply the right discipline to the question the data is supposed to answer.
About this analysis
This critique appears as Appendix D (Federal Reserve Bank of New York) in We Need To Talk About Higher Education by Leon Shivamber.
Get the book → Read the argument in full → Run your own numbers →
Notes
- Abel, Jaison R., and Deitz, Richard. “Is College Still Worth It?” Federal Reserve Bank of New York Liberty Street Economics, April 16, 2025. Reports a 12.5% Internal Rate of Return for the median college graduate in 2024, calculated using Census Bureau and BLS Current Population Survey data. Total costs are estimated at $180,000 ($30,000 in direct costs plus $150,000 in opportunity costs). Median college graduate earnings: $80,000. Median high school graduate earnings: $47,000. Room and board are excluded from direct costs. Returns calculated pre-tax. Sensitivity test: quadrupling out-of-pocket costs to $112,000 reduces return to 9.2%.
- Abel, Jaison R., and Deitz, Richard. “When College Might Not Be Worth It.” Federal Reserve Bank of New York Liberty Street Economics, April 16, 2025. Published the same week as (1). Finds bottom-quartile graduates earn 2.6% returns. Six-year completers see returns fall to approximately 7%. Returns vary substantially by field: engineering, math/computers, business/economics, and health sciences produce the highest returns. Fine arts, liberal arts, leisure/hospitality, and education produce the lowest. Room and board differential reduces returns by approximately 1.5 percentage points. Extended time to degree reduces returns by 25 to 40 percent.
- U.S. Department of Education College Scorecard. https://collegescorecard.ed.gov/ and https://collegescorecard.ed.gov/data.
- Federal Reserve Bank of New York. “The Labor Market for Recent College Graduates.” Updated regularly.
Related critiques
This is one of four close readings of the major college ROI studies. See the others, then read the audit that weighs all four together and the plain-language case beneath them.