young people (ages 18-25) in the US gambled $67 billion. Not in Vegas
or online poker rooms, but on a betterment program called college.
Their hope is that the monies they are spending will allow them to earn
more money over their lifetime. Many are paying for this wager by
amassing a mountain of debt that will take years to pay off. Is it a
good wager? Conventional wisdom says so, but with $67 billion on the
line (and that's debt accumulated in just one year by college
attendees) we should have more than conventional wisdom or parental
pressures to guide the way to smart economic decisions. REEF’s
economic analysis shows that college is a financial mistake for more
than half of the American young people today. Shielded from scrutiny in
this transaction by an assumption of 'public good' are universities and
college lenders who many expect to provide guidance to these young
people. While the data hints at ways for some individuals to improve
the odds of a positive financial outcome, half the people attending
college should hear the frank counter-intuitive advice, "Don't go to
The analysis begins by assessing a college education purely as a
monetary investment. Undoubtedly, there are other benefits beyond money
to attend college, but it's such an enormous economic decision that it
seems foolish to not fully understand the financial ramifications and
use that as a primary factor in the decision process. Overall, college
grads do have higher earnings than non-grads, but that's only part of
the equation. A deeper analysis looks at the costs of acquiring that
degree and the monies including interest charges which need to be
repaid. (At the end of this piece is a complete listing of the data
sources used and a walk through of the calculations.) Using a 40 year
time career, here is the total return which look at earnings, college
expenses and interest.
Investment (college expenses)
|Earnings Over 40
Year More Than High School Grad
(subtracting out debt servicing)
Interest Rate on Investment
that a college education is an extremely poor economic investment for
private universities and while better for public institutions still
poses a meager return when compared to typical investments. To put this
another way, most financial planners expect a 7-8% annual return. If
you proposed to them a 40 year investment with expected yields of 2-4%
on average they would most surely recommend against it. Making matters
worse the numbers used for this calculation use average salaries for
men. Since average women salaries are less college is even a poorer
investment for females.
You may walk through of all calculations and a link to the spreadsheet
file, but we want to anticipate some of the criticism likely to be
pointed out. First, in our calculation we assumed 100% debt financing.
Few students finance 100% of their academic costs. Some have parents
that pay all or a portion of the costs. Some qualify for financial aid
such as grants. But just because the monies are coming from another
source doesn't change the effective return. It just distributes the
poor investment to a wider pool of people (taxpayers and parents). Let
us examine what the numbers look like if you're lucky enough to have
your parents pick up the whole tab, but instead of using the monies to
go to college, you invested them in a balanced portfolio which returned
7.5% annually and got a job straight out of high school. For this
example we use public University fees ($76,776). Private school would
have even a greater disparity.
|Lifetime Median Earnings
|Earnings Over 40
($76,776 at 7.5%)
indicate is that trust fund babies (or anyone who has parents paying
the college tab) would be better off taking their college funds and
investing them, bypassing college entirely and working at whatever job
they could get without a degree.
There are a few important conclusions to draw from these numbers.
Conventional wisdom tells parents they should be pushing their kids to
college. For many young people this may be awful advice dooming them to
a mountain of debt they will struggle with for decades if not the rest
of their life. Exploding costs of higher education tuition (up 35%
in the last five years and double digit growth for more than a decade)
have far outpaced income growth making a college education a poor
choice for half or more of the population.
Private colleges dramatically cut in half the expected return taking it
from 4% to 2%. Public Universities are a better financial choice. It is
unlikely government schools are run more efficiently, but rather they
receive substantial sums of state and federal tax money defraying the
cost to the student. In effect, taxpayers are shouldering some of the
costs reducing the expense to the attendee.
This doesn't mean college is a bad choice for everyone. The income
numbers used were based on median salaries from U.S.
means that half of the people in the U.S. will do better, but half will
also do worse. The problem is that every student will likely think
they'll do better than the average. This is the same mentality people
go to Las Vegas with and feed the slot machines hoping to win. Deep
down they know the numbers are against them, but their emotions
override any rational thought and decision making process.
Unfortunately we are not talking about a few hundred dollars of
tens of thousands of dollars.
At 18, many are ill-equipped to make a rational decision about whether
to take on $70,000 of debt pursuing a degree (fortunately college was a
tiny fraction of that two decades ago making it a significantly better
investment). Universities are increasingly like casinos selling hope
with no mention of the underlying economic realities. They receive
payment up front and if students depart and struggle to get a high
paying job, the university sees no financial repercussions. There are
few classes emphasizing learning a specific skill to increase earnings
out of college. There are no mentions to avoid majors like art history,
medieval literature, philosophy or other degrees with low earning
potential. There's little interest in producing graduates with specific
skills in high demand since there's no direct financial ramifications.
(There are some exceptions like UCSD working with Qualcomm to produce
wireless engineers, but this affects very few students.)
A flourishing college loan company makes it remarkably easy to secure
tens of thousands of dollars of debt with just a signature. Most
concerning is that student loans are not eligible for bankruptcy
relief. Make a bad decision starting a business, buying a car,
financing a house and you can seek bankruptcy protection. No such
opportunity exists for student loans. This financial decision lives
with you forever. Once saddled with large debt - job choices, housing
choices and even marital options can be greatly impacted. It's nearly
impossible to save for a down payment on a house. Jobs have to be
evaluated based purely on base salary terms. Prospective spouses may
hesitate to get married fearing they will take on the repayment
obligations torpedoing their own credit.
Young people have limited capacity to understand the long term
implications of their decision, yet it is not in the economic interest
of universities or loan companies to disclose these stark realities.
Every university and loan company has growth plans achievable only by
increased enrollment. This means more kids than ever will be enticed to
attend college by hearing all the positives. But today it's a poor
economic decision for half the students. There is no data to
suggest wages are likely to increase significantly or that
college expenses will drop from today's levels, which means we'll see
continued deterioration making it a poor choice for even more than half
of those attending college.
Few young people will be able to independently assess the value in
advance and counter the societal and parental pressures which push them
to attend college at any price. It's imperative those with influence
over young people make an unemotional analysis prior to college and
point them to an appropriate path. For top students this means
selecting public schools instead of private. Mediocre students should
take advantage of lower cost options like Junior colleges to reduce
costs and insure they are benefiting from advanced education. Both
should be sensitized to the importance of selecting a high income major
to increase the likelihood of a positive outcome. Half the students
should be discouraged from attending college and pointed to a
vocational career path. The expensive traditional 4 year liberal arts
education approach is now failing the majority from an economic
perspective. New approaches with a greater emphasis on direct
vocational skills are required. Quick realization of the economics of
college education is imperative to avoid dooming half a generation of
young people to inescapable, life limiting debt.
Copyright 2006: REEF (www.aboutreef.org)
Authors: Michael Robertson, Tina Donaldson
of this article is encouraged. If written authorization is required
contact Tina Donaldson at 858-784-0165 ext. 100
The Math Behind The Numbers Explained:
Median numbers from the 2004 US Census Bureau
for male high school and
college graduates were used to calculate income levels. Incomes were
then calculated over a 40 year period. (The median is the middle number
at which half are over and half are under.) US Census data was used
rather than numbers published by a university affiliated organization
to insure impartial data.
The constructed career model assumed at high school graduate starting
salary of $19,994 with 1.8% annual income growth. College graduate
starting salary was calculated at $34,145 with an 2.25% annual income
growth. The total lifetime income for both high school and college
students were in line with US Census data.
|Lifetime Median Earnings
College costs and average years to achieving a degree were calculated
Board School Pricing 2006. (Rounded down to the nearest full
|Cost Of Attendance
Years To Completion
student loans have a legislated 6.8%
interest rate with a
maximum amount of $23,000.
Private loans range from 12-17%.
For this analysis a 12% interest rate was used
all private loans.
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