I've written a lot about the value of a college degree including the following:
But here's a piece from MSN Money that says a college degree isn't a good deal. To prove their point, they take two friends, Bill and Ernie, and make these assumptions:
Ernie and Bill are the same age and each saves exactly $16,594 for college.
Ernie doesn't get accepted to a school he likes. Instead, he starts work at 18 and invests his college savings in a mutual fund that tracks the broad stock market.
Ernie makes average yearly pay for a high school graduate with no college, starting at $15,901 after taxes and peaking at $32,538. Each month, he adds to his stock fund 5% of his after-tax income, close to the nation's current savings rate. It returns 8% a year, typical for stock investors.
Bill gets into a public college and after two years transfers to a private one. He spends $49,286 on tuition and required fees, the average for such a track. I'm not counting room and board, since Bill must pay for his keep whether he goes to college or not. Bill gets average-size grants, adjusted for average probabilities of receiving them, and so pays $34,044 for college.
Bill leaves school with an average-size student loan and a good interest rate: $17,450 at 5%. The $16,594 he has saved for college, you see, is precisely enough to pay what his loans don't cover.
Bill will have higher pay than Ernie his whole life, starting at $23,505 after taxes and peaking at $56,808. Like Ernie, he sets aside 5%. At that rate, it will take him 12 years to pay off his loan. Debt-free at 34, he starts adding to the same index fund as Ernie, making bigger monthly contributions with his higher pay.
They then detail the results:
But when the two reunite at 65 for a retirement party, Ernie will have grown his savings to nearly $1.3 million. Bill will have less than a third of that.
Why is this? The summary:
College degrees bring higher income, but at today's cost they can't make up the savings they consume and the debt they add early in the life of a typical student. While Ernie was busy earning, Bill got stuck under his bill.
In other words, saving early beats earning more.
This isn't a new concept here. I talked about the same thing awhile ago (though it was about investing) in The Best Way to Maximize Your Investment Return.
The author admits that there are flaws that could be poked in his analysis and that the standard of living of the two men will likely will be different, but the point is made. A college degree isn't the slam dunk financially it once was. Especially when you assume today's "averages" for college students. (He goes on to argue about an alternative system of higher education, but that's beyond the scope of what I'm covering today.)
But who's striving to be average? Yikes! Is that the standard we're holding ourselves up to? I know it's not, and it's not what the author intended. And yet, that's what his numbers are based on. So what can/should potential graduates do to make the most of their college degree financially? I'd recommend the following:
1. Make the cost of college as low as possible. Why pay what the "average" person pays? Why not take steps to get your education for as little as possible? For instance, instead of going to a public and private college (as assumed in this example), what about going to a junior college and transferring to a public on after two years? This alone will save a TON of money. For more ways to cut the costs of college, see Five Ways to Reduce College Costs, 10 Ways to Reduce College Costs, and How to Get the Most Financially Out of College.
2. You can also work during college. Assuming your income is zero during this time may be what average people do, but you don't have to follow suit. And not only will working in school help you out financially, but it will also kick-start your career.
3. Only borrow money that makes sense to borrow. What does this mean? It means that you match the cost of college with your potential post-college earnings. A teacher with $100,000 in debt doesn't work out financially while a medical doctor with $100,000 in debt is fine in many cases. See what I mean?
4. Do everything you can to grow your career once you get out of college. Develop a system to regularly over-perform in your job and you'll end up getting promotions and pay increases that the Average Joe doesn't get.
Believe this can't be done? Think again. It's what I did. If you want details, see How I Made Millions Off a $5,000 Investment.