Pay for College or Invest the Money?
So, you have saved up some cash and would like to pay for college, or perhaps pay for your child's college. It is conventional wisdom that college is very valuable and everyone needs a degree so this is a no-brainer...but you have also read a lot recently about massive student debt, unemployment, and low wages among degree holders.
There is no question that people with a bachelor's degree on average earn more money than someone without. They don't earn just a little bit more, they earn roughly $900,000 more during a lifetime. I have read a number of studies and they fluctuate, but generally hover right around that $900k mark. One such study goes into some detail. It seems like college is clearly worth it, right? We should analyze the value of the college the same way we would analyze anything else and compare it to what we could earn with other investments.
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Average Earnings With a Degree
As I mentioned above, there is about a $900,000 increase in lifetime earnings or right around $19,500 per year more. Its kind of silly to just give it a flat number because we know that we get raises as we continue working. Age-Income distribution has also been studied widely and we can see the chart put out by the US Census Bureau that wages tend to flatten around the age of 35 for most workers. What is more important to look at is the how age affects the earnings for bachelors degrees and no degrees. For that, take a look at the next graph.
You can see that earnings for degree and non-degree holders are very similar for the first ten years of employment, then they diverge widely up until the end of the graph at 30 years of work. For the purpose of my analysis, I will just assume their increase in wages is uniform across their entire life. This actually will provide a huge boost to argument of having a degree because that's 10 extra years of compounding interest that it really won't have. You'll see what I mean later.
What Does College Cost?
When I started doing research for this article, I noticed that most news sources cite an amazingly low cost for the 'average' 4 year degree being around $25,000. A lot schools are charging around $20-30k per year so how is this possible? I researched several major public universities and found that most universities are charging their in-state students around $13-14,000 per year for a total of $55,032 for a 4 year degree once tuition, fees, room, board, books, and other expenses are included. The cost of college can fluctuate quite broadly as cheap programs may be as low as $20 thousand and other schools can cost as much as $50,000 per year before you even count room and board! That's over $200,000 for a 4 year degree. I'm not sure what the average salaries are walking out of those schools, but the cost is astronomical!
What Does College Really Cost?
Ok, Didn't I just cover that? Yes, but I didn't include the Opportunity Cost. In order to study for 4 years you must give up 4 years of employment. In my research I found that average wages for those with no degree according to the BLS is at $34,736 in 2014. For this research I actually used a slightly older number which had wages at $34,197. Essentially, the student must give up $136,668 of income in order to attend college.
What if I work and go to college?
College is designed in such a way that it is a full time job. 12 credit hours should be more than 40 hours of work. Working a full time job and going to school full time can be compared. Working a full time job and going to school would be similar to working 80 hours a week. To compare evenly, you would need to assume our non-college person also has two jobs. The difference will end up being the same and we should stick with the number of $136,668.
Total Cost of College is:
$191,820. That's a bit more than what we read about in the news.
$900k is still a lot more than $191k, so it's still worth it right? Well I don't know yet because I'm not done figuring out the true value of each.
How Much College Truly Earns You in a Lifetime
In order to compare, I will take two very rational young people who will invest all of their extra money. Person #1 will invest their $19,565 extra dollars every year up until the age of 69. I used 69 because the most major study considered 'lifetime earnings' to be up until the age of 69. They will invest it at the end of each year in the stock market, which has averaged 10% return per year over the last couple decades.
It's hard to see the detailed results on this page but if you invested your entire "College Premium" of wages into the stock market, in a lifetime you would earn $17,040,622 more than a person without a college degree. WOW!
How Much Would I Earn if I Invested my College Money
Investing Your College Money
So this question is slightly different. Before, we started with no money and had annual contributions of roughly $19,500. Now, we are starting with a large sum of money and adding nothing over the years. A few things are happening here - First, we will accrue interest for 4 extra years because those college years are now working years. We will invest the entire cost of college up front ($55,032) and then invest one year salary each year for 4 years ($34,197 per year). I punched it into a compound interest calculator and got the following results for total worth at age 69
Total: $19,185,408. Again, WOW! The numbers here are absolutely crazy.
So, you should invest your savings rather than pursue a degree! Well, sort-of. If you had to choose between an "average" degree and investing your money, you may want to invest your money.
A Deeper Look at the Value of Education
I borrowed some information from the National Center for Education Statistics and found the following information which I put into a graph:
Average Salary for Different Degrees
Clearly, your choice in degree matters a lot. Some of these degrees barely earn more than a person with no degree, yet they cost nearly the same as a business or engineering degree. What a waste of money!
Types of Degrees Earned
According to my calculations, a person would need to earn roughly $22,000 more per year in order to make the numbers break even, or a total of approximately $67,000 per year. This wipes out the value of virtually every degree except Computer Science and Engineering. The problem is, most people get degrees that have little value. Take a look at this pie chart I put together using data from nces.ed.gov:
Realistically, only about 8% of students are getting a degree that will help them find a job that will earn more than simply investing the money into the stock market.
Education and Investing
Though investing your money is clearly a better decision than going to college, I think it is really only applicable in a few ways. Investing your money in the stock market is better than getting an average degree and doing what average people do with those degrees - get jobs. Alright, time to bring this conversation back to topic, how does this all related to business and investing. This entire website is dedicated to not working a job, so I wouldn't think a job is the best use of those degrees anyhow. I think a degree is only useful if it helps you start a business or become an investor.
According to Manta.com, 69% of small business owners had a degree but only 68% of those with degrees thought it was important to their success. Compare this to a poll where 97% of Americans believe college is at least somewhere important for success and financial stability. It's really telling that 62% of small business owners found no difference in performance between those with and without degrees.
So, parsing the numbers more deeply, 69% of business owners have degrees and 68% think they are important which means only 47% of business owners felt they succeeded because the degree helped them. I am personally in that 47% camp but the numbers do show that a degree is clearly not necessary to be successful in business. Additionally, Experian research shows that business owners of all education levels earn roughly 21% more than non-business owners.
Education opens up new ways to invest
Personally, I still think education is important and it is more than just dollars. Though it is true that clearly a degree is overpriced for most majors, I think a college can open up opportunities that may not have otherwise existed. It is an unfortunate fact that people are judgmental. Someone with an MBA will be taken much more seriously when trying to get funding for a new business than a person with a high school diploma.
Additionally, the personal contacts you could gain at a university will be very important.If you want to become a real estate investor, you may know some business students from college that can help you with financing. Perhaps you want to open up an import/export company, you may know a college friend who works in a logistics company. The knowledge is important, but these personal connections are critical.
Education leads to greater financial understanding
Having a good Finance, Business, or Economics related degree will truly open up your understanding of financial markets, the economy, business, and other investing opportunities. Making more money is important, but it is also important to understand how to spend that money and invest the savings wisely. Good education will help you with all of this.
I am a huge advocate of education, as long as it is the right type of education. Choose majors that will provide a life-time of opportunity and open doors for you.