...the more interesting question is whether Krugman is right to be pessimistic about the future returns to a college education. The market disagrees. If the market agreed with him, college enrollments would be plummeting because college is expensive, not only in tuition but also in opportunity costs—the income forgone by being in school. College enrollments continue to increase relative to population, and, more important from a market perspective, more and more high-school students express a desire to go to college, even though if Krugman is right their college education will not produce lifetime earnings increments sufficient to offset the cost of tuition and the cost of their forgone earnings during their college years. [Emphasis mine.]
Posner admits that the market could be wrong:
A high school student, and his parents, are hardly in a good position to predict the structure of the labor market in ten or twenty years. Most people base most of their expectations for the future on simple extrapolation from the recent past. Often that’s the best one can do in the presence of profound uncertainty.
Poor information and uncertainty may be part of it, but I think the Becker-Posner model of effective suicidality (truncated utility function) could apply here. It is not necessarily that young people predict that a college degree is a good investment; it is that life without a college degree, for many middle-class people, would be an unimaginable humiliation, on the level of social death. We bet on education to establish social belonging, and we are not sensitive to the serious bad consequences entailed by failure, because not taking the risk leaves us in a position worse than death. It's simply unthinkable.
In fact, the increasing prevalence of college education itself makes college ever more "required" for one's social belonging and self-respect. In effect, it raises Id (reduces utility for a given income) across the population (even for people whose utility functions are not truncated, which leads to misery at higher levels of income). Society as a whole is on a hedonic treadmill.
When I was a freshman at MIT, Noam Chomsky told a small group of us that college was where society was storing us to hide the fact that there wasn't enough meaningful work to go around.