Is A College Degree Still Worth It?

Is A College Degree Still Worth It?

The cost of higher education at both public and private colleges has grown 440% over the last twenty-five years, according to the National Center for Public Policy and Education. That’s nearly four times the rate of inflation and double the rate of increase of health care costs. Possibly as a consequence, total U.S. student loan debt – $830 billion as reported in the Wall Street Journal last August – exceeded total U.S. credit card debt for the first time in history.

Are we getting to the point where a college degree is no longer worth it?

For many parents today, a college education will be the single most expensive purchase they make, even including their home. And while it’s been a maxim that college graduates earn more than non-college-educated people, over the past two decades the costs of a college education – tuition, room, board and fees – have increased at a rate six times greater than the increase in the average earnings of college graduates. On top of that, since 2008 the starting earnings of college graduates have been falling. If you consider a college education as an investment in someone’s future, wouldn’t it be nice if you could calculate the actual return on such an investment (ROI) to see whether or not it makes financial sense?

PayScale.com, a website that reports pay scales for various types of jobs, did just that. They surveyed alumni with bachelor degrees from five hundred of the larger colleges and universities across the country, estimating in current dollars the earnings of the respondents over a thirty-year work-life. They then calculated the 30-year net return by subtracting the estimated earnings of a comparable high school graduate, additionally factoring in the length of time it takes to get the degree (which varies from school to school) while the comparable high school graduate is earning income. Finally they measured the costs of getting a degree and the probability of actually earning the degree based on each school’s graduation rate. From this data, PayScale calculated a rate of return on the investment in any specific college.

Here are some examples from PayScale’s 2011 survey:

Stanford University: $210,400 cost; $1,478,000 thirty-year net return; 11.5% ROI
UC Berkeley: $110,000 cost; $1,167,000 thirty-year net return; 12.9% ROI
Chicago State University: $100,500 cost; $34,860 thirty-year net return; 5.2% ROI

There are obvious limitations to the PayScale data. It is based upon only those alumni that chose to respond to the survey. It also excluded those alumni that went into professional and entrepreneurial careers, for which consistent salary data is harder to determine. Nonetheless, it’s an interesting first step towards helping make the college investment decision a more rigorous financial one.

How might parents utilize this data? Suppose your child qualifies for three different universities. You could compare the interest rate on a college loan to the ROI for each school. If the loan rate were higher than the school’s ROI, the investment would be considered unprofitable (the cost of capital would be higher than the projected return). This is similar to the way most businesses make decisions about investing in new projects. With the current rate for college loans at about 6.8%, Chicago State University would have a tough time attracting students whose parents follow this methodology.

Keep in mind that a college education includes more than the simple absorption of knowledge. There’s the social experience, for example, living away from home for the first time and learning how to start taking care of oneself. The value of that is very difficult to quantify. It’s also likely that, since the current rate of increase in college costs is unsustainable, colleges will find ways to save costs and improve learning efficiencies. Nonetheless, parents might want to start considering the ROI of a college education when helping their children make their plans. It may be a life changing experience for your child, but it’s still an investment.

 

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