Why Companies Pay for College

Summary of working paper 9225
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Tuition assistance programs appear to allow firms to hire better quality, more educated, more productive, employees.

Why do so many companies provide tuition assistance for their employees who pursue post-secondary education? College courses give employees new "general skills" that raise the ability of these workers to qualify for higher pay - their market wage - and may enable them to more easily jump to another job in another firm. General skills, such as communications and analytic ability, are not necessarily aimed at the specific tasks of employees. But even occupationally specialized post-secondary programs, such as nursing or computer programming, are valuable to a great many employers. The employer costs of such education are not trivial and are often quite generous. Yet they enable employees to obtain degrees or other readily identifiable credentials that make them more marketable to other firms.

"It is something of a surprise that any employers should offer such support, let alone that most employers do," notes Peter Cappelli in Why Do Employers Pay for College?(NBER Working Paper No. 9225). Attempting to solve the mystery, Cappelli finds that tuition assistance programs appear to allow firms to hire better quality, more educated, more productive, employees. That extra productivity makes it economically feasible to pay a large portion of employees' tuition bills.

Further, tuition assistance tempts employees to stay longer with the company as they make use of the benefit, spending their evenings and weekends working through a schedule of college courses towards a degree - a part-time process that could last many years. Lower turnover saves employers on the substantial costs of searching for and hiring new employees to replace those leaving. Tuition assistance also may give employers a hint as to which of their workers possess superior ability.

Cappelli's findings suggest that employers are not providing tuition assistance just out of the goodness of their hearts. Nor, the evidence indicates, are they artificially holding down pay levels to cover the costs of tuition assistance. Employers are not subjecting their employees to training or apprenticeship-type arrangements with lower pay while they build up necessary skills, the author finds. Indeed, most employers prohibit access to tuition benefits for new hires, and the employees themselves decide whether and when to use the benefits. If employers were to mandate training, legislation would require them to pay the full cost of that training, provide it during working hours, and pay non-exempt workers their full wage while receiving the training.

Tuition assistance stands as an important element in the financing of higher education. The American Council of Education estimates that roughly 20 percent of graduate students and 6 percent of the much larger number of undergraduates receive some financial assistance from their employers to attend school. As many as a third of undergraduates in fields like business and engineering receive tuition assistance from their employers. Tuition assistance is the most common source of financial aid for college students, and on average it covers about one-third of the average annual cost paid by post-secondary students.

Various surveys show that most big companies provide tuition assistance. A 1993 Hewett Associates survey of 858 firms found 99 percent of them offering tuition assistance with about 6.5 percent of all employees in these firms making use of the programs at any one time. A 2002 survey by the Society for Human Resource Management of 510 employers found 79 percent offering educational assistance of various kinds.

Cappelli uses data from National Employer Survey II by the Census Bureau that in 1997 surveyed a representative sample of establishments in the United States. The survey found that 88 percent of employers provided tuition assistance. The survey also asked employers about the average education levels in their workforce and of their new hires.

-- David R. Francis