Bryan Caplan looks at Giving Up, Failing Out, and the Return to Education:
Borrowers rarely default on their loans. Nevertheless, differences in default rates have huge effect on rates of return. Suppose, for example, that two lenders charge 3% interest, but one has a default rate of 1% and the other has a default rate of 2%. The first lender has twice the rate of return of the second. After all, when the first guy lends out $100, he gets back .99 * $103 = $101.97, while the second only gets back .98 * $103 = $100.94.When labor economists calculate the return to education, however, an analog of default is strangely missing. How is that possible? Simple: Labor economists normally measure the effect on earnings of successfully completed years of schooling. In other words, they assume the best-case scenario where every educational investment concluded with a year’s worth of passing grades.
In reality, though, people often enroll for a year of school, attend for a while, and then give up. And sometimes they attend for a full year, but get failing grades. Either way, they spend most or all of the cost of a year of education (including foregone earnings), with little or no benefit. It’s analogous to defaulting on a loan — you spend the resources, but don’t get the return.