College costs continue to climb faster than inflation. Students are graduating with five (or six) figure student loans. Is it worth dedicating 4 years of our lives to rack up this debt? Does a college degree pay off financially over the course of the average graduate’s life?
The numbers
The more education a person has, the more money they make over their lifetime. A person with a bachelor’s degree makes 66% more than a person with just a high school education. A person with a Master’s degree makes 97% more, a doctorate increases your earnings by 158%, and a professional degree results in 178% higher earnings. That’s a lot of money.
But the question is not whether going to college results in higher average incomes. The answer to that question is obviously yes.
What we want to figure out is if college is worth the investment. There are actually two different costs to get a college degree – the obvious financial cost of tuition, books, etc, plus the lost income from attending college for 4 years instead of working.
Cost of college – financial
This includes tuition, fees, books, and other expenses. I’m not including room and board, as you’d need to pay those expenses whether you’re working or going to school. According to collegedata.com, in-state tuition plus books and fees is $14,363 for 1 year, which works out to $57,452 for 4 years. Some schools are more expensive, some are less expensive, but I live in Southern California and UCLA is a great school, so I’m going to use it in this example.
Of course, most students don’t pay the “list price” for college. Less wealthy students usually receive need based assistance. Students with good grades or athletic prowess will receive merit based scholarships or grants. Since financial aid varies from student to student we’ll ignore it for now and just remember that this is a “worst case” analysis of the cost of college.
If you skip college you save that $57,452. If that money was instead saved and invested, then at 8%/year for 40 years, the $57,452 saved by not going to college becomes $1,248,117.21 at retirement.
That’s a pretty big number, but there’s still another cost to account for.
Cost of college – opportunity cost
The second cost of going to college is the opportunity cost of not working for those 4 years. The average high school graduate makes $30,000/year, or $120,000 for the 4 years the college student is in school.
If we again assume 8% returns, this works out to be $2,606,942.58 after 40 years.
Benefit of college – higher income
The average college graduate makes $49,900. That’s $19,900 more than the high school graduate. If we assume that both the college graduate’s income and the high school graduate’s income increase at the rate of inflation, then this difference will also increase at the rate of inflation. For example, if over time the high school graduate’s income doubles to $60,000 and the college graduate’s income doubles to $99,800, the difference between them has also doubled, to $39,800.
Studies have shown that the percentage increase in income from having a college education has actually increased over the years. This is probably because in the past there were large numbers of good paying manufacturing jobs available to those without college degrees. Now that those jobs have largely been shipped overseas the typical jobs available to high school graduates are lower paying.
Benefit of college – lower unemployment
In addition to a higher salary, unemployment drops linearly with educational attainment. Last year workers with a high school degree had 5.4% unemployment rate, those with a bachelor’s degree were at 2.8%, and those with a professional degree had a mere 1.5% rate of unemployment.
This is a significant factor, as unemployment can devastate a family’s finances. Given the abysmally low savings for most families in the US, it would only take a month or two of unemployment to wipe out all savings for most families. The fact that a degree halves your chances of unemployment is significant and removes a significant amount of risk from a family’s finances.
To capture the financial impact of unemployment I’ll reduce the average high school graduate’s income by 5.8% and the average college grad’s income by 2.8%.
The calculations
Since I’m a math geek I’ve put all of these numbers into an Excel spreadsheet so I could run the numbers and see if, in fact, college makes financial sense. If it DOES make financial sense I wanted some way to quantify the value.
Here is the table I put together.
| Not going to college | College | Value of college degree | |||
| Year | Cumulative value of saved tuition + 4 years earnings | Additional yearly income w/ college degree | Cumulative value of college degree | ||
| 1 | $170,972.00 | $18,503.75 | $19,984.05 | -$150,987.95 | |
| 2 | $184,649.76 | $19,058.86 | $42,166.34 | -$142,483.42 | |
| 3 | $199,421.74 | $19,630.62 | $66,740.72 | -$132,681.02 | |
| 4 | $215,375.48 | $20,219.54 | $93,917.08 | -$121,458.40 | |
| 5 | $232,605.52 | $20,826.13 | $123,922.67 | -$108,682.85 | |
| 6 | $251,213.96 | $21,450.91 | $157,003.47 | -$94,210.49 | |
| 7 | $271,311.08 | $22,094.44 | $193,425.74 | -$77,885.34 | |
| 8 | $293,015.96 | $22,757.27 | $233,477.65 | -$59,538.31 | |
| 9 | $316,457.24 | $23,439.99 | $277,471.06 | -$38,986.18 | |
| 10 | $341,773.82 | $24,143.19 | $325,743.39 | -$16,030.43 | |
| 11 | $369,115.72 | $24,867.49 | $378,659.75 | $9,544.02 | |
| 12 | $398,644.98 | $25,613.51 | $436,615.12 | $37,970.14 | |
| 13 | $430,536.58 | $26,381.92 | $500,036.80 | $69,500.22 | |
| 14 | $464,979.51 | $27,173.37 | $569,386.99 | $104,407.48 | |
| 15 | $502,177.87 | $27,988.58 | $645,165.61 | $142,987.74 | |
| 16 | $542,352.10 | $28,828.23 | $727,913.35 | $185,561.25 | |
| 17 | $585,740.27 | $29,693.08 | $818,214.94 | $232,474.68 | |
| 18 | $632,599.49 | $30,583.87 | $916,702.72 | $284,103.24 | |
| 19 | $683,207.45 | $31,501.39 | $1,024,060.44 | $340,853.00 | |
| 20 | $737,864.04 | $32,446.43 | $1,141,027.42 | $403,163.38 | |
| 21 | $796,893.16 | $33,419.82 | $1,268,403.02 | $471,509.86 | |
| 22 | $860,644.62 | $34,422.42 | $1,407,051.48 | $546,406.86 | |
| 23 | $929,496.19 | $35,455.09 | $1,557,907.09 | $628,410.91 | |
| 24 | $1,003,855.88 | $36,518.74 | $1,721,979.90 | $718,124.02 | |
| 25 | $1,084,164.35 | $37,614.31 | $1,900,361.75 | $816,197.39 | |
| 26 | $1,170,897.50 | $38,742.73 | $2,094,232.84 | $923,335.34 | |
| 27 | $1,264,569.30 | $39,905.02 | $2,304,868.89 | $1,040,299.59 | |
| 28 | $1,365,734.85 | $41,102.17 | $2,533,648.74 | $1,167,913.89 | |
| 29 | $1,474,993.63 | $42,335.23 | $2,782,062.69 | $1,307,069.06 | |
| 30 | $1,592,993.12 | $43,605.29 | $3,051,721.42 | $1,458,728.29 | |
| 31 | $1,720,432.57 | $44,913.45 | $3,344,365.65 | $1,623,933.08 | |
| 32 | $1,858,067.18 | $46,260.85 | $3,661,876.63 | $1,803,809.45 | |
| 33 | $2,006,712.55 | $47,648.68 | $4,006,287.33 | $1,999,574.77 | |
| 34 | $2,167,249.56 | $49,078.14 | $4,379,794.70 | $2,212,545.14 | |
| 35 | $2,340,629.52 | $50,550.48 | $4,784,772.80 | $2,444,143.28 | |
| 36 | $2,527,879.88 | $52,067.00 | $5,223,786.98 | $2,695,907.09 | |
| 37 | $2,730,110.28 | $53,629.01 | $5,699,609.26 | $2,969,498.99 | |
| 38 | $2,948,519.10 | $55,237.88 | $6,215,234.91 | $3,266,715.81 | |
| 39 | $3,184,400.63 | $56,895.01 | $6,773,900.32 | $3,589,499.69 | |
| 40 | $3,439,152.68 | $58,601.86 | $7,379,102.35 | $3,939,949.68 | |
Here’s what the numbers mean:
- The first column is obvious – these are the 40 years in an average person’s career.
- The second column is the savings from not paying for college plus the income from 4 years of working instead of attending college. For the first year this works out to
- Cost of attending college + (4 years of work – unemployment rate), or
- $57,452 + (120,000 – 5.4%) = $170,972.00
- This number is then assumed to be invested and earning 8% returns per year for the next 40 years. So in year two the value is $170,972 + 8% = $184,649.76
- The third column is the difference between salary of the average person with a college degree and the salary of a person with a high school degree, or
- (College graduate salary – unemployment rate) – (high school graduate salary – unemployment rate)
- Year one = ($49,900 – 2.4%) – ($30,000 – 5.4%) = $18,503.75
- This number is then increased by 3%/year to account for inflation
- The fourth column is the total of taking the additional income earned by a college graduate and investing it @ 8%, or
- (Previous year’s total + this year’s additional income) + 8% gains, or
- Year one = (0 + 18,503) *1.08 = $19,984.05
- Year two = ($19,984.05 + $19,058.75) + 8% = $42,166.34
- The final column is just the difference between the sum of the value of the college degree vs. the money saved from not attending college
Observations
As expected, a student would be better off early in their career by not going to college. The money saved by not going to college, plus the earnings for 4 years of work are significant – at the end of the first year the non-college graduate is $150,987.95 wealthier.
In the second year the college graduate only makes up $8,504.53 of ground. The college graduate is still behind the high school graduate for the first 11 years! That means it takes until around age 35 for the average college graduate to catch up to the high school graduate. However, at this point the college graduate is making significantly more money than the high school graduate and is rapidly pulling away. By year 25 the college graduate is $816,197.39 ahead, and by retirement the college graduate is almost $4M ahead of the high school graduate in lifetime earnings!
A few other things to consider
- This assumes the college graduate receives NO scholarships or grants
- This assumes the high school graduate makes the average high-school only salary in his/her first year of work. This is obviously unrealistic, as a brand new worker would be on the low-end of the wage scale, not at the average
- This does not take into account the value of a college degree likely resulting in a more fulfilling job in addition to a more lucrative one
- This does not take into account the intrinsic value of an education – learning more about the world around us, being exposed to new and interesting ideas, etc.
- This assumes the value of an average degree. The numbers are likely to be better with a STEM degree and worse for a liberal arts degree.
I was actually surprised that it would take 11 years for the average graduate to catch up to a high school graduate, but I was also surprised at the magnitude of the difference by the time retirement rolls around.
The somewhat sad aspect of all of this is that a person who forgoes college will initially think they made the right decision. Until they are in their mid 30’s they’ll be ahead of their peers who went to college. Then suddenly the college grads catch up. By the time they are in their 50’s the college grads are practically lapping the high school grads. If you’re a high school graduate you’ve suddenly gone from doing well relative to everybody else to being left in the dust. It’s no wonder that a lot of people feel the economy isn’t working for them.
What are your thoughts on college? Are there any other financial benefits of college that I’ve missed?