Monday, December 29, 2008

Is College Worth It?

After RN's comment a few posts back, I decided to do a back of the envelope calculation on the college investment.

Let's start with the ROI. Here are some stats on average earnings based on education level. There are two statistics - average earnings and average lifetime earnings. Both statistics are troublesome since a lot of details are excluded, but since this is a very rough calculation, let's use the lifetime earnings calculations. A high school degree nets you lifetime earnings of $1.2M and a bachelor's degree nets you lifetime earnings of $2.1M, a $900K difference. I assume this is over around 40 years of working, which correlates reasonably closely with the average annual earnings difference of $22K.

So college clearly boosts earning potential. Now let's look at the investment side of the ROI equation. Here are some college costs statistics. Again, there are a range of costs, but let's take a mid-point number and assume that college costs $25K a year. Add to that the lost earnings, which according to the previous link, should be around $30K a year. For a four-year college, that's a $220K investment.

Let's be a bit silly and assume you could take that whole investment and earn 5% a year on it over 40 years. You would end up with $1.575M, which compares very favorably with the $900K difference quoted above.

There are at least a dozen serious problems with this comparison as calculated above, but even taking those into account, it should be clear that college is not the slam-dunk choice that most people consider it to be.

At a minimum, it is a very bad idea to send your child to a $40K a year college so they can earn a liberal arts degree that will barely boost their income. Financially, at least, it is better for them if you stick that money into an annuity and teach them a real trade.

A few years down the road, I am guessing the plumber with a nice annuity is going to be in much better financial (and possibly mental) health than the Comparative Lit major with the $100K+ in college debt.


Yo Gabba Gabba said...

As you note, the liberal arts averages are bringing that number down considerably. There are only so many Bill Gates in the world. While college is way overrated, it is still a necessary keycard to the middleclass.

Also, don't forget most people don't pay for college on day one. They pay back on low rate loans. Your premise assumes you have a huge chunk of change you invest instead of spend. If you have that chunk of change, then chances are you are upper middle class and the cost is then relatively less.

Let me be clear. I agree college offers very little concrete. 4 years in a trade or military would be far more beneficial in a tangible analysis. Intangibles are too hard to quantify.

Restless Native said...

I have, if affirmative action or anything like it holds up, managed to avoid this problem entirely by having minority kids. Free rides all around!

Failing that, I think the boys would look great in coveralls.

GammaBoy said...


"Also, don't forget most people don't pay for college on day one. They pay back on low rate loans."

That's just one of many problems with my analysis. It was very back of the envelope, and if anyone actually decides not to send their kid to college on the basis of the post, they are a bigger fool than any Mana major.

My point was that college is no longer the slam-dunk it once was. It has just gotten too expensive.

Restless Native said...

Whoa, tiger, with the libelous Mana comments. But for divorces from gold-digging whores (talk about libelous) my Mana degree has served me splendidly. Multi-"discipline", holistic, super-easy, magical. A degree to beat all degrees.