This is a guest post from Jason Barr, who writes about personal development at Start Being Your Best. Jason is a potential Staff Writer for Get Rich Slowly. His first post described what he learned from failure. Jason is 32 years old, has been married for seven years, and has a 2-1/2 year old son. He’s now a financial analyst, but he spent five years in the army as a Chinese linguist.
What is the value of your college education? It seems as though it is almost impossible to find a job today without one, and even advanced degrees are becoming more and more commonplace. But is it really crucial for “success” (defined here in a financial sense; your definition of “success” may vary) that you even have a college diploma? There’s an argument to be made that it’s not.
The value of a college education
I’m currently saving funds for my son (who’s 2-1/2) to attend college. It’s a daunting task. According to collegeboard.com, the price of a four-year university rises somewhere in the neighborhood of 5.5% to 6.5% a year. It’s actually a higher rate of increase at public institutions than at private. An 18-year-old, beginning their studies in the 2009-2010 school year, can expect a tuition bill of $109,828 for a four-year degree at the average private university in the United States (assuming a 5.9% increase year-over-year). That’s the kind of money we’re talking about here.
But, according to the United States Bureau of Labor Statistics, the median income in 2008 for a worker with a high school education was only $591 a week, while a college graduate’s median salary is $978. Seems like a good trade off, right? Surely it’s money well-spent.
Perhaps not. Let’s assume you were able to provide these types of funds for your son or daughter to begin school in September of this year. Four years from now they’ll emerge, debt-free, into the workforce and will secure a job for a salary of $50,856 (adjusted for an annual rate of inflation of 4% assumed for this exercise). Assuming a constant 4% rate of inflation, and salary adjustments to keep up with that pace until retirement at age 65, your progeny can expect a lifetime earning potential of around $5.9 million. Not too shabby, right?
Against the grain
But what if, instead of paying for your child’s education, you provided this lump sum to them in a one-year certificate of deposit, earning the current highest return available (2.24% as of the writing of this article, according to Bankrate.com)? Now the child’s salary would be greatly reduced; the lifetime earning potential would only be $4.2 million assuming the same circumstances as before.
However, assuming that in both scenarios the child in question was able to save 5% of their annual income (assumed to be a lump-sum deposit at the beginning of the year to keep calculations simple), the child with the high school education will have accumulated $646,532 in the one-year CDs by the time they’ve reached retirement age. The child with the college degree would only accumulate $438.132, a difference of $208,400.
Perhaps it could be argued that the child with the college degree could live with the same expense basis as the one with the high school education, thereby freeing up more money for saving and investing. However, I would encourage a recognition of Parkinson’s Second Law, which tells us that “expenses rise to meet income”.
Rich or poor, thrifty or not, the current savings rate as of the end of May for Americans was only 6.9%. For much of the recent past it’s been lower than that, even to the point of occasionally becoming negative. For as many responsible people who are reading these words, there are many more who would be swept along by circumstances and society, spending exactly what they make (or more), year after year.
Public vs. private
What if one were to assume a lower university bill? Perhaps a private school isn’t in the cards for these two kids (and their parents), but a public four-year institution could be.
The current median cost of four years at a public university for the 2009-2010 school year is only $29,021. At that rate, assuming the same parameters as before (rate of salary increase and inflation, etc.), the college grad does come out ahead, but only by $26,090 at age 65. Certainly, that’s a much smaller margin than I would have assumed, and I would guess it surprises many of you, as well.
In fact, for the lifetime earnings calculation to balance (that is, for both the high school and college grad to show the same dollar figure in savings at retirement age), the high school graduate would only need a “head start” fund of $38,030! Just think, for less than the price of a new SUV, four years of college-educated earning power can be rendered moot. This result, frankly, surprised the heck out of me.
Other scenarios could be run, as well. What if you’re not able to provide any funds at all for your son or daughter? My folks didn’t pay for any of my college expenses; I expect many of you are/were in that same boat. One could look at the opportunity cost of college loan repayment vs. a clean slate for a high school grad with no debt encumbrance.
For a graduate of an average private university, repaying a college loan bill of $114,626 at 6% interest (remember, student loan interest is capitalized while the student is in school) will take 10 years and $152,710. That’s assuming they’re able to make the monthly loan payments of $1,273 right out of college, and don’t have to go with a longer-term repayment plan. After this is done, the college grad will only amass $37,272 more in savings than the high school grad, simply due to the long repayment period they must overcome.
Do what works for you
Be sure you always challenge the conventional wisdom. While often times it’s conventional wisdom for a reason, there are often unforeseen circumstances that cause things to turn out differently than one would expect.
Is a college degree a guarantee of financial prosperity over a high school diploma? As with everything in life, the answer isn’t cut and dried. Depending on the circumstances, it’s entirely possible that college doesn’t make sense for everyone, even from a financial perspective.
If you have the ability to provide a financial gift to your child such as the ones discussed here, you may be wise to consider it, in order to provide options for your children that they may not otherwise have. Certainly there are other things to be gained from a bachelor’s degree than just increased earning potential, just as there may be benefits to some kids to go straight into the work force. It’s really important that a child attend college due to consideration of their goals, not just because “it’s the right thing to do”.
For some people, it may not be.
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