Columnist Michael Taylor explores whether college is a good investment, financially speaking.
I always enjoy a good debate, especially ones where everyone thinks they already know the final answer.
A friend sent meal ink to a blogger Erik Rood, who makes a nice case for why investing innot pay as well as we might think, compared to competing financial opportunities.
Rood presents the thought experiment of two 18-year-olds. One takes a loan out for tuition money, but instead of attending college, she invest sin the stock market for 24 years instead. Along the way, she works earning the average salary of a high school graduate with no advanced training. The second 18- year-old borrows the same amount for college, graduates after four years, and then gets a job earning the average salary of a college graduate for the next 20 years. So who made the most money? Rood references Payscale. com data for approximately 1,250 institutions, and he adjusts for the probability of actually graduating from college when calculating investment returns. He also specifically measures the previous 24 years of stock market returns, from 1993 to 2017, which yielded an annual return of 7.1 percent. Only about 10 percent of institutions show a return on investment via graduates’ salaries that exceeds the stock market returns over that period.
One obvious cave at to Rood’ s analysis is that 18- year-olds generallycan not borrow a few hundred thousand dollars to invest in the stock market for 24 years, leaving his analysis purely theoretical.
Still, his big idea intrigues me: There are plenty of scenarios in which getting a four-year college degree hardly makes pure financial sense, versus other uses of the money.
Finance columnist Scott Burns and his co-author Laurence Kotlik off make a related-sounding argument in their book“Spend Til The End” regarding the lifetime consumption power of students attending private four-year colleges, versus someone who goes to work straight out of high school.
According to their math, which also assumes borrowing money to attend an expensive four-year college, an average graduate takes home just 10 percent more across their lifetime compared with the average high school-only graduate.
Burns and Kotlikoff point out that this average advantage for the college graduate isn’t great, especially considering sacrificed youth, and the risk that many college graduates will not even reach the average.
Obviously, if parents pay for college, the calculation changes. But while that is great for the kids, it doesn’t change the economics of attending a costly college. It still may not make sense from a pure economic standpoint, given the thin 10 percent advantage gained by graduates.
I don’t think the correct conclusion to this analysis is to urge your favorite 18-year-old student to just turn on, tune in, drop out, get a job and just like chill, man.
I’d summarize the correct conclusion rather as: The pure financial returns to a costly education may not be as high as you think, and the more you pay, the less likely you are making a sure-fire good-money bet.
We can admit that this type of analysis makes big assumptions that weaken the is-college-worth-it analysis for our own lives.
First, data on earnings will show the median earnings from college graduates. Many will earn more, many will earn less, but the group will include people who might not need to work for a living, or include people who decide not to work outside of the home.
For people who become the primary bread winner, the average earnings data will probably under estimate their earning potential.
Furthermore, for people who prioritize earning money after college, we would expect certain types of engineering degrees to lead quickly to higher-paying work, while less technical degrees have lower pay, at least in the first few years.
We also quickly note that the price of a four-year bachelor’s degree varies tremendously between cheaper public institutions and private institutions. It also widely varies between the stated sticker price of college and the true cost after scholarships and financial aid.
Clearly, any financialwhich the annual price of the thing being analyzed varies between zero and $65,000 per year has some wiggle room for debate.
Part of what’s unsatisfying about this debate is that we have a huge variety of variables, from quality of education, to course of study, to cost of education, to professional goals around making money. Averages don’t really capture that complexity.
Of course, the most important answer to the debate is that attendingcollege is not solely, or even primarily, a financial transaction.
It’s an opportunity to develop our potential for thought, empathy and our highest value to society. A cost-versus-benefits analysis cannot capture that full value. But if you’re just looking at dollars and cents, the financial return remains questionable.
We are not abstract economic actors mechanically trading dollars and time units of education today for dollars in the distant future. We are also concerned with developing our capacity to understand our world, to develop our greatest human potential, and to expand the limits of our souls.