Monday, April 18, 2016

Is College Worth the Cost?

Here is something worth thinking about.  Young people spend five or six years getting a college education, some with the belief that it will help them do better financially in life.  Let’s look at a few numbers dealing with averages to show how this assumption can go wrong.

First we must address opportunity costs.  While attending college a student typically is not working, except possibly part time to contribute to current expenses.  Time spent at college is time lost to earning (and experience and possibly seniority).  We need an estimate of how much time that is.  A Time Magazine article from 2013 tells us:  “According to the Department of Education, fewer than 40% of students who enter college each year graduate within four years, while almost 60% of students graduate in six years.”  For a rough average, five years seems reasonable.

Next look at the relative average pay for a college graduate and a high school graduate.  The National Center for Education Statistics helps out there:  “in 2013 median earnings for young adults with a bachelor's degree were $48,500, compared with …$30,000 for those with a high school credential."  (Note: The Start Class website lists 22 colleges where the median salary of their graduates is less than what a high school graduate earns, but we’ll stick with the averages.)

The salary difference is substantial, but don’t forget the opportunity costs.  Right off the graduation stage with diploma in hand the college graduate is already 5 years of salary (@$30,000 per year = $150,000) and five years real work experience behind.  The average graduate is also almost $30,000 in debt.

Assuming out any interest on loans and the effects of inflation (to keep it simple), the graduate needs to make up about $180,000 just to get even.  With an advantage of $18,500 in salary (before taxes) it will take nearly 10 years to close the gap.

This is for the average.  Some will do better and some worse.  It takes a few more assumptions and a few simple calculations to get down to the individual case.  Additionally, college is not for everyone and some people with only a high school education can do much better than average.  The big watch out, however, is that competition for unskilled or semi-skilled jobs is fierce – not just here, but in places like Mexico and Asia where a $20 hourly wage job can be done by a replacement earning $4 or less per hour.

It is important for every high school student to consider these issues carefully and calculate the likely long-term outcome using realistic personal assumptions.  I heard of one young man who chose a private college at $40,000 per year over a public college at about $12,000 per year because the private college was smaller and he had a better chance to make an athletic team (no scholarship involved).  The five-year difference will be almost enough to buy a modest house in the part of the country where he lives – and his goal is to be a high school math teacher!  Even if he gets that teaching job, chances are he will work an additional 6 to 10 years just to make up the difference financially of this one decision.

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