University Dropout Generates Negative Returns for Public Budgets and the Students Concerned

About one in four students in Germany drops out of a bachelor’s programme and about one in six drops out of a master’s programme. Although many of those affected start vocational training after dropping out, the time spent at university has negative financial consequences both for the tax authorities and for the dropouts themselves, according to a recent study by ZEW Mannheim. On the one hand, dropping out becomes a negative business for public budgets: Compared to high school graduates who go straight into vocational training, the government expenditure for dropouts exceeds the expected income from taxes and other levies over the following 40 years of their working lives. On the other hand, dropouts face a negative individual return on education compared to the reference group.

“There are ways to mitigate the negative effects. Providing information about attractive alternatives to studying at university can help encourage high school graduates to pursue vocational training who would otherwise likely leave university without a degree. In addition, it is helpful to introduce measures that support students in successfully completing their studies, such as clearly structured curricula and regular contact with lecturers,” says Friedhelm Pfeiffer, acting head of the ZEW Research Department “Labour Markets and Human Resources” and co-author of the study.

For public budgets, individuals dropping of a degree programme generate a negative return of minus 5.9 per cent on average, while a successful completion of a degree programme means a positive return of 6.6 per cent. Individuals who drop out of university after two years and subsequently complete a three-year vocational training programme also face negative returns. In comparison, the individual returns to successfully completing a degree are over seven per cent.

In addition, the economists used data from the Socio-Economic Panel to analyse at what income level there would cease to be any fiscal return to education for graduates. In the simulation, gross income would have to be about 15 per cent lower for the returns to the public budget to fall to zero.