Is Better Information Improving Students' Return on Investment? Lessons From Chile

Much has been said about the need for better information on college outcomes. Especially in an era of spiraling college costs and rising debt, it is more important than ever for students to be able to understand their return on investment - and thus, the theory goes, make better decisions.

Their career decisions have repercussions for the broader economy. Subsidizing education for low income students through loans and grants has the potential to boost worker productivity and the competitiveness of the nation as a whole. But as research from education expert Andrew Kelly and others has shown, too many low income students are poorly matched to career tracks that don't reflect their interests or offer a high rate of return - leading to more dropouts and worse lifetime outcomes.

In this context, governments are stepping in to improve the transparency of information and reduce funding for programs that underperform. In the United States, the Obama administration has championed a new "college scorecard" to help students compare the costs and benefits of various career tracks. Similar efforts are underway elsewhere.

Yet it is not clear exactly what impact such policies will have. One interesting case study looks at this question as it pertains to the case of Chile, a country with perhaps the best overall education performance in the Latin American region. As of 2010, 38 percent of adults ages 25 to 34 had completed higher education - compared with 42 percent in the United States. Of these, 35 percent took advantage of state-provided student loans.

The paper, entitled "The Effects of Earning Disclosure on College Enrollment Decision," was published this summer by the National Bureau of Economic Research (NBER). The authors, Christopher Neilson, Justine Hastings, and Seth Zimmerman, from Princeton and Brown universities, add important empirical data to the conversation.

"Students from low-income backgrounds are harder to reach with information than other students, even when using direct communication from the educational authority near the time of application," they write, pointing to some of the difficulties. But, they continue, "once reached, positive effect on information on the net value of the chosen degree are concentrated among low-income students."

Ultimately, the authors came to an optimistic conclusion about the ability of government programs to better match students with careers, writing that "the returns on investments in informational interventions are potentially high." Students given more and better information made better decisions that substantially improved their income trajectories - especially students from a lower income background.

However, the research also confirms that many students choose their career paths based on personal interest rather than projections of future earnings. Thus, in many cases more information won't change their choices for or against - pointing to some of the limitations of these policies.

The role of student loans - which often place a significant burden on graduates long after they have completed their studies - also comes under scrutiny. Career information distributed at the same time as students are considering their loan applications does tend to have a greater impact, the study finds, although "it is possible that information could have a larger effect on behavior if it were distributed earlier in secondary school as well as at the time or loan and enrollment choice."

Another important consideration is the education level of a student's parents. In Chile, there is a major generational gap: only 19 percent of 55 to 64 year olds have a higher degree, compared with 41 percent in the United States. Less educated parents will be less able to advise their own children on how to choose the best career path.

When asked why more governments aren't pursuing this relatively inexpensive policy, study co-author Christopher Neilson argued that it could be traced to the nature of government action. "It's because it is an innovation," he told me. "Its something new, something based on big data, and it's not surprising that governments lag in developing these innovations, but it does not have to be that way." But interestingly, the private sector has been equally slow to meet this need - perhaps pointing to a deeper lack of understanding of the benefits of better informed students or lack of data - its much harder for private sector to access records on education and taxable earnings like the government can.

"Developing the ability to collect data and using it to provide timely information on the labor market return on various career paths is an extremely helpful public policy - and what's more, its low cost. It's a great first step," says Neilson. Despite the difficulties and uncertainties involved, there is a very good case that governments should take that lesson to heart.