Here's an interesting article from the Brookings Institution that looks at the value of a college degree. Particularly interesting is that they evaluated getting a four-year college degree using common investment guidelines. from this they determined the rate of return on the "investment" of getting a college degree. The summary:
The answer is clear: Higher education is a much better investment than almost any other alternative, even for the “Class of the Great Recession” (young adults ages 23-24). In today’s tough labor market, a college degree dramatically boosts the odds of finding a job and making more money.
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.
I'll let you read the nitty gritty details on how they did the evaluation, but it looks pretty complete to me (though I'm sure some will not agree with their assumptions -- and they had to make many). But they consider all the key factors IMO: the cost of college, the lost income while attending college, average income for college grads, and average income for non-college grads. It's the most complete attempt I've seen in determining whether or not college is "worth it." Then it goes beyond that question to tell how much "worth it" it is -- by calculating a return rate.
I'll get to some additional thoughts in a minute, but for now, here are a few quotes from the piece that I think are especially interesting:
- The average worker with only a high school degree earns only about as much as a college graduate one year out of school. In other words, the average college graduate will surpass the highest earnings of the average high school graduate soon after graduating.
- The $102,000 investment in a four-year college yields a rate of return of 15.2 percent per year—more than double the average return over the last 60 years experienced in the stock market (6.8 percent), and more than five times the return to investments in corporate bonds (2.9 percent), gold (2.3 percent), long-term government bonds (2.2 percent), or housing (0.4 percent).
- Over a lifetime, the average college graduate earns roughly $570,000 more than the average person with a high school diploma only—a tremendous return to the average upfront investment of $102,000 investment. An associate’s degree is worth approximately $170,000 more than a high school diploma.
- We all know that each person is different, and it’s possible (and even likely) that individual college graduates have different aptitudes and ambitions, and might even have access to different levels of family resources. All of these factors can impact earnings. However, the evidence suggests that these factors don’t drive the impressive return to college; instead the increased earning power of college graduates appears to be caused by their educational investments.
- In addition, our analysis focuses specifically on the benefits of completing a college degree. Unfortunately, many people start college and don’t finish, resulting in educational costs but not leading to a degree. However, evidence suggests that those who attend college, even if it’s only for a year, earn more than those who don’t start college at all. Depending on how the costs and benefits shake out (the data on this is hard to come by) this could reduce the return to starting college.
- There are other reasons why our analysis may underestimate the value of attending college.
- Indeed, the recession has not fundamentally changed the math: although a college degree has upfront costs, it important to remember that it is an investment that pays off over time. The evidence clearly shows more education improves your chances in the labor market, in both good times and bad.
- Warren Buffett recently told Columbia Business school students, “Right now, I would pay $100,000 for 10 percent of the future earnings of any of you.” (Tucker, 2009). He is not a legendary value investor for nothing: When compared to other investment options, a college degree stands out as one of the best investments one can make.
Fascinating stuff! I recommend you read the entire piece if you find the time.
Now, here are my thoughts:
- Yes, this is analysis is "on average." That means some will do better, and some will do worse. That said, 15.2% is the average return rate. So even for those who do a lot worse and "only" get a 10% return, they are doing pretty well indeed.
- On the plus side, it's not that hard to do better than average. An above average student at a "decent", inexpensive college who chooses an above average earning degree/major can do much, much better than the masses. It gets to be pretty compelling when you think how lucrative such an investment can be -- as it was for me.
- I understand that some people are not "college material" and couldn't get a degree if they wanted. They are not doomed to a career of low earnings necessarily since there are many options for go-getters. But having a high income will be a challenge for most of them. So perhaps an associate's degree is a reasonable substitute. Getting one actually offers a better return rate (though less total income) than getting a four-year degree.
- As the cost of college increases (which it seems like it will do for the foreseeable future), the return rate will go down. Then again, there's a long way to go before the return rate hits a level that's in the "skip college" range.
- The analysis above doesn't take into account the fact that college graduates often have more employment choices which, I'm guessing, makes them more likely to LIKE what they do for a living. Which option do you think is better: doing something you like and making a good salary or doing something you don't like as much and making a fraction of that? The latter choice offers a lose-lose proposition.
- That Warren Buffet comment is pretty compelling, isn't it (remember he's a VALUE investor who likes to pay several times below what he thinks something is actually worth)? I hadn't heard that before.
I know this topic will be debated for a long time into the future, but after reading this I'm even more solidly in the "worth it" camp for most students (assuming they go to college the right way -- keep costs low, get a degree, etc.) What's your take on the analysis?