College as an Investment

College as an Investment

We’ve talked in the past about how much your college degree is worth. Given the current economic environment, especially as it relates to employment opportunities (or lack thereof), I’d be willing to bet that many recent graduates are second guessing their decision to lay out the money required for a college degree.

According to a recent study from the Brookings Institute, however, higher education is a better investment than the alternatives, even for the “Class of the Great Recession.” Really? Really.

Jumping ahead to the punchline, the study concludes:

On average, the benefits of a four-year college degree are equivalent to an investment that returns 15.2 percent per year. This is more than double the average return to stock market investments since 1950, and more than five times the returns to corporate bonds, gold, long-term government bonds, or home ownership. From any investment perspective, college is a great deal.

Breaking down the cost of college

So how much does college really cost?

Considering both public and private schools, a four-year college degree costs an average of $48k. When you factor in the opportunity cost of not working during those years, the total rises to $102k.

Note: On average, an 18-19 year old with a high school diploma earns an average of just $11, 600/year whereas a 20-21 year old in the same situation earns just $15, 400/year.

On the other hand, if you pursue an associate’s degree, you can expect to spend an average of $5200. Adding in two years of missed work (ages 18-19) brings the total to $28k.

College compared to investment alternatives

Now that we have a baseline cost, let’s consider the return-on-investment for a college degree vs. alternative investment options. Let’s start by assuming that a recent high school graduate has the choice of investing $102k (or $28k) in a bachelor’s (or associate’s) degree, or putting it into an alternative investment of some sort.

What should our hypothetical graduate do?

If you run the numbers, and account for differences in lifetime earning potential, you’ll learn that the investment in a bachelor’s degree returns an average of 15.4%, whereas the associate’s degree returns an average of just over 20%.

Wow. We should all favor an associate’s degree over a bachelor’s degree, right? Not so fast… The advantage of an associate’s degree is primarily due to its low cost. When comparing lifetime earning potential, the bachelor’s degree wins by a mile.

Note: This isn’t an entirely fair comparison, as the hypothetical associate’s student should have $102k – $28k = $74k left over for alternative investments, and the study doesn’t account for this.

In terms of raw numbers, the average four-year graduate earns $570k more over their lifetime than the average high school graduate. The two-year degree holder, on the other hand, earns $170k more over their lifetime than the high school graduate.

What about the alternatives? Looking across the past 60 years, the stock market returned an average of 6.8%, corporate bonds returned 2.9%, gold returned 2.3%, long-term government bonds returned 2.2%, and housing returned 0.4%. All of these pale in comparison to the 15-20% returns associated with higher education.

Beware the averages…

Of course, any study of this sort is loaded with caveats. For example, an individual that goes to an extremely expensive school and picks a low paying major will have very different results from an individual who attends a less expensive school and chooses a high paying major.

It’s also worth noting that college is not a silver bullet. Not everyone is cut out for college, and there are likely to be major differences (on average) in socioeconomic status, innate ability, etc. between those who choose to pursue college and those who do not. It’s thus not entirely fair to ascribe the earnings advantage to the additional layer of education.

And, of course, there are the extreme outliers. I’m thinking here of those who never went to college (or who started and quit) but wound up making a fortune. See, for example, Bill Gates.

What do you think? Is college worth the cost?

11 Responses to “College as an Investment”

  1. Anonymous

    Strictly looking at numbers, this makes sense. But not everyone fits the typical college mold. What about those who drop out? Knowing whether or not college is the right step is critical. What about those who don’t get work in their degree field? No real way to predict this ahead of time. So, “the averages” don’t always tell the whole story.

  2. Anonymous

    What I don’t see mentioned in this post is that a great many students rack up student loans to pay for their education. This, of course, is going to impact the return on investment calculation. If I had it to do over again and in this current economic climate I would not take student loans to go to school. Paying off our student loans has been very difficult and costly. Both my husband and I went into fields that, at the time, were well paying. They are now fields that pay very little and are difficult to find jobs in. No one would have guessed it back then and often people are surprised to find out the realities of the current state of these professions. The only thing either of us would change, however, given 20/20 hindsight is taking out our student loans to pay for school (we worked for our living expenses. Our loans paid strictly for school.).

  3. Nickel

    Josh: I had the same thought initially, but they are actually accounting for time lost looking for a job upon graduation as well as job instability. Nonetheless, like I said at the end of the article, there are a lot of caveats here… For example, those that don’t seek out college may be less motivated or less capable, and thus earn less than an otherwise college-bound individual would earn if they decided to work instead of going to school.

  4. Anonymous

    I agree with Kevin that working and going to school certainly builds character. It also teaches you how to balance multiple obligations, which will be invaluable if he intends to pursue a Master’s once he is working in his field, or if he intends to raise a family and work.

    Additionally, one huge advantage can be interesting work opportunities. I worked part time for a retail store for 7 years while going to high school and college. During that time, I learned every aspect of the store, and was put in charge of the location on multiple occasions. Once I graduated from college, I was immediately offered a full-time HR position. This led to really fantastic opportunities, and allowed me to double my income within a year of graduating. I also “temp”ed with a hiring service at a corporate office, and this offered an awesome hourly salary (no benefits) and fantastic work experience.

    So, I guess the moral of my advice is: Working now can lead to a smooth, financially lucrative move to the work sector once he is done (Especially if he can temp or intern at a finance office!).

    And, as an added bonus, if he works a little extra and puts some away, he will be able to afford a snappy new work wardrobe once he is on the professional job hunt(My mom swears by the Power Suit!).

  5. Anonymous

    Hereâ??s my take: an investment is a risk. Just like investing in your retirement with a 401k has proven to be no guarantee that youâ??ll be OK, investing in a college degree is also no guarantee. It could backfire. Look at the housing market. People ignorantly assumed their investment would always increase. But thatâ??s just not reality. Sure, some investments are less risky than others, but they all come with risk.

  6. Anonymous

    Thanks for your response – I really appreciate your advice.

    Also, to clarify, he has worked for various companies for over 10 years since high school – and is not exactly having the typical ‘college experience’ at this point in his life. He’s taking a full courseload, living at home and all free time is devoted to studying to get the best possible opportunities when he graduates – as quickly and efficiently as possible.

    Additionally, I think it’d be a stretch to think he’d be overwhelmed by this debt, because it will not be very much at all relatively. It would just go towards his small fixed living expenses.

  7. Anonymous

    Clare — A minimum wage job plus part time school will build a character that is different than if living on today that you plan on repaying sometime in the future. One will come into contact with individuals of all sorts of different social strata, which often has a dual effect of appreciating the value of an education just a little bit more but also not letting it puff oneself up, meeting many fine people who are not going to go to college. I think it is a harder road and often a longer road, maybe missing out on what many folks call their “college experience” phase of life, but also never a subject of one of those “heart-break” article about how some are over their head in student loan debt.

  8. Anonymous

    This quote is very misleading: “On average, an 18-19 year old with a high school diploma earns an average of just $11,600/year whereas a 20-21 year old in the same situation earns just $15,400/year.”

    I’m assuming they are grouping kids that are just working part-time and planning to go, or going to college in that.

    If an 18 year old decided to bypass college and work full time, even at a minimum wage job 40 hours per week ($7.25/hour)they would be making around $15,080/year. If the have any ambition at all they could just something that pays better or work there way up to something in the $30/k year job without too much effort, and these are just lower-end dead end jobs I’m talking about. There are lots of other jobs that pay well too, you could become a trucker at 18 making ~40k/year. Lots of other decent jobs that don’t require a degree, or trades that pay well you can get into as well.

    All that said, I still prefer the college route, BUT, I think most people would be better off financially skipping college and working, as long as they have the discipline to save/invest a lot of that money. If you have the luxury to live with your parents for a few years, you could be buying a house for cash in your twenties, and retiring in your 30’s, were as most college grads will be burdened with a lifetime of debt by then.

  9. Anonymous

    I’m not sure if this is the right place to ask, but I’m seeking some college-related advice:

    A close friend of mine was laid off about 2 years ago. He took this opportunity to move home, and pursue a bachelors degree in finance, and is now about half way complete.

    His family is paying for his tuition, however as his unemployment runs out shortly – he is now facing having to balance both work and school (which is not unreasonable and certainly many people do it!)

    However, knowing that he is living at home, with a car paid off, and his family paying for his schooling – he really has no debt and his focus so far has been 100% school – and as a result his grades are very high. The most significant expenses he currently has is a cellphone, books and car insurance. The only job he would be qualified for at this point would be minimum wage, and it would be somewhat intermittent – as he would be looking for an internship next summer.

    So my question is – what would be your advice for taking out some small student loans for living expenses vs. getting a minimum wage job + school?

    Not sure if this is the right thread for this question, but I’d be interested in any advice!

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