William C Dudley: Higher education - financing, costs and returns Opening remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Conference on “Higher Education Financing and Costs and Returns of Higher Education”, Federal Reserve Bank of New York, New York City, 7 December 2017. * * * Good morning. It is my pleasure to welcome you to the New York Fed for today’s conference on the costs and returns of higher education and higher education financing. I am delighted to see such broad interest and attention from the academic community on this topic. The role of education and education financing in today’s labor market and economy has never been more important. It is a topic that I have spoken about frequently during my tenure here at the New York Fed, especially with regard to education’s importance for economic mobility. Understanding educational investment decisions and their macroeconomic implications requires rigorous analysis from top academic researchers like you. Let me briefly discuss some developments that I find particularly significant and worthy of investigation. As always, what I say represents my own views and not necessarily those of the Federal Open Market Committee or the Federal Reserve System.1 As has been well documented by Raj Chetty and his co-authors, income inequality has increased in recent decades, while economic mobility has stagnated. Meanwhile, absolute mobility appears to have fallen, indicated by the declining share of children who earn more than their parents.

The combination of high inequality and low mobility is problematic, because it means that being born into a low-income family is more consequential today than in the past. Since education is a key determinant of upward mobility, one way to increase economic mobility in the United States would be to increase overall post-secondary educational attainment. There are, however, a number of important barriers to achieving that goal. First, many high school students and their parents appear to lack accurate information about the returns obtained from a college education. New York Fed research shows evidence of systematic underestimation of the average benefits—and overestimation of costs—of a college education, with larger biases among lower-income and non-college households. Research by Caroline Hoxby and Sarah Turner shows that among low-income high school students, even very high achievers are poorly informed about the academic options that are available and their effects on career opportunities. This research finds that the provision of relevant information can lead to markedly better outcomes. A second impediment is the lack of preparedness among new college entrants, with large numbers of those students needing remedial courses that earn no college credit. Low readiness contributes to persistently low college completion rates, especially among lower-income, parttime, and nontraditional students. Higher dropout rates, in turn, contribute to a substantial reduction in the net expected and realized returns from college attendance. The third major barrier to college attendance and completion is the rise in the cost of a college education.