Fiscal and Individual Rates of Return to University Education With and Without Graduation

Based on a detailed model of the German tax-benefit system, this paper simulates private and fiscal returns to education for college graduates and college dropouts. Completing a five-year college degree is found to be associated with an internal rate of return (IRR) of 14.2% for gross earnings, 7.4% for disposable income, and 6.6% for the net fiscal contribution. Individuals who drop out of college after two years, and subsequently complete a three-year period of vocational training, are found to have negative IRRs: -0.5% for gross earnings and -5.9% for both disposable income and the net fiscal contribution. In a series of counterfactual experiments, we explore how these returns react to changes in gross earnings, expenditure per student, and the level of income tax payments.

Pfeiffer, Friedhelm and Holger Stichnoth (2020), Fiscal and Individual Rates of Return to University Education With and Without Graduation, ZEW Discussion Paper No. 20-016, Mannheim.