Nowadays, it is hard to go a week in visiting personal finance news magazine websites without seeing a story about the impact of student loan on the borrower.
Research has shown that student debt has very negative effects on the US economy and life in general. Those negative effects include:
- Delaying marriage and delaying the start of a family
- Hampering the growth of small businesses and entrepreneurship
- Hurting the housing market given debt heavy borrowers cannot afford the down payment or obtain financing
- Struggling to save for retirement
- Not having enough funds saved for an emergency
Talk about wanting a good start in life and then realizing your student debt provides a huge hurdle.
Because I want to give my kids a good start in life after college, my wife and I have been saving aggressively in their 529 college savings accounts.
College Cost And Student Loan Debt By The Numbers
The number is mind blowing when it comes to the cost of college. Student debt number is even more negative than college cost.
College Stats:
- Private college tuition cost increased by 130% over the past 20 years.
- The average increase in tuition for a private college is 4.6% per year for the past 20 years.
- Public college tuition went up even more with an increase of over 200% over the past 20 years.
- The average increase in tuition for a public college is 5.9% per year for the past 20 years.
- Room and board adds approximately another $12,000 to the 2018-2019 numbers.
- One year of attending Harvard University with only tuition, fees and room and board is $67,500. 4 years will cost over $270,000 (more than the average cost of a house in America).
Student Loan Stats
- $1.56 trillion in total student loan debt outstanding in the U.S. in 2019 and still growing!
- 69% of college students took out student loans and they graduate with an average debt of $29,800.
- 7 million Americans have student loan debt.
- 4% is the student loan delinquency or default rate.
No matter how you slice and dice the data, it is truly alarming the financial burden and the debt burden placed on the shoulders of college students.
Given the huge increase in college tuition, fees, room and board, and the debt taken out to pay for such a high priced education, college should be viewed as a financial investment first and foremost above anything else.
Let’s Examine What You Truly Pay And What You Really Get
From a financial investment standpoint, is college a great investment?
Isn’t the answer yes? At an early age, my parents have instilled in me what they defined as a successful path.
Work hard in school. Get into a good college. Graduate with a college degree and then pursue a professional career.
It never occurred to me to even ask if college is a good choice for me or a good investment. It was a foregone conclusion very early on that college was not really an option, but a requirement.
College, as I’ve been told, is the only way to lead to a high paying job and a better life.
It is no wonder my initial thought automatically defaults to college is a great financial investment.
But I’ve dug a little bit deeper by researching the true cost of college and what a college graduate earns in return when compared to someone with a high school diploma.
According to the Bureau of Labor Statistics, the median earnings for a 25 year old in 2018 with the highest educational level as a high school graduate are $730 per week.
The median earnings for a 25 year old Bachelor’s degree graduate are at $1,198 per week.
Assuming a 50 work week year, the annual pay for a high school graduate and a Bachelor’s degree graduate is around $34,000 and $56,000, respectively.
Now, the difference between a high school diploma and a Bachelor’s degree is a 64% increase in pay. At the face of it, this seems like a lot.
But as I dug a little deeper, the analysis tells a different story.
The True Cost Of A College Education
As you can see from the table above, the cost of tuition is $10,000 per year for a 4 year public university and $36,000 for a private non-profit university.
4 years of going to a public university will set you back about $43,000, assuming a 3% rate of inflation on tuition cost. Unfortunately, the tuition bill is not the only cost with going to school.
There is the opportunity cost. This is the cost associated with the loss opportunities from investing 4 years of your life into school.
A high school graduate, instead of spending 4 years at college obtaining a Bachelor’s degree, could spend those 4 years working instead.
Based on the $34,000 a 25 year old high school graduate makes, and working back to their compensation at age 19 to 22, the high school graduate would have earned an additional $127,000 during those 4 years in school.
Therefore, the true cost of attending a 4 year public university is the cost of tuition ($43,000) and the opportunity cost ($127,000) for a total cost of $170,000. Now that sounds a lot more expensive.
Instead of a public university education, a private university education will set you back even more. The true cost of the education is $277,000 over 4 years.
Who Would Earn More – A High School Graduate Or A College Graduate?
Let’s meet John, Mike, and Paul.
John started working a full time job after graduating from high school. He decided college wasn’t the right move for him.
John decided to save his earned income from the age of 19 to 22 by living a life similar to a college kid. He is investing that head start earnings as his retirement fund because he understands that having an early start is the key to achieving great wealth.
Mike, on the other hand, wanted to further his knowledge and felt that going to a 4 year public university can help him accomplish just that. His parents do not have any college savings. Mike needs to borrow his entire college tuition.
Paul’s parents went to a 4 year private university and couldn’t stop talking about the great time they had as college students. Ever since a young age, Paul has always wanted to go to that same university.
Paul’s parents also fail to save any money for Paul’s college tuition. But Paul is insistent on attending the private university and has taken out the necessary student loans to do so.
So who will actually earn the most: John, Mike or Paul?
If you said Mike or Paul, you would be wrong. John is the earnings winner here.
Income Difference Between HS and Public College With Student Loan
As you can see, John makes out better if he decides to save his earnings for the 4 years while Mike and Paul are in college and invest it in the stock market.
Assuming future returns mirror historical returns (of course there are no guarantees on this), John’s annual income will surpass Mike (after adjusting for student loan payment) by the age of 27 and is immediately superior to Paul’s earning.
Over the span of 40 years, John would have earned $9.7mm in total. Mike and Paul, even with their 4 years of college education), come in at over $4 million in lifetime earnings.
John will also end up with a higher nest egg for retirement.
The analysis clearly shows that the high school graduate will earn more than the private college graduate immediately. It will take 4 years for the high school graduate to surpass the total annual earnings of the public college graduate.
The Better Financial Move Is To Keep And Invest The Tuition Money Than To Attend College
Jill has an important choice to make regarding her life after graduating from high school. Her parents were diligent savers and saved enough for Jill to attend a 4 year private university with all tuition covered.
Which choice can help maximize Jill’s future income? The best choice for her is to actually take the tuition savings, invest that amount, get a job and not go to college.
True Income Difference Between High School Degree and Public College
I know it sounds crazy, but the numbers above tell the story. Jill will be far better off in earnings and savings after 40 plus years of working. The numbers aren’t even close.
Instead Of Purely A Financial One, Other Reasons To Attend College Do Not Make Sense
If you are attending college for any other reason than for financial reasons, then you should contemplate a cheaper alternative for them.
To Find Oneself
I get it. Life is scary, especially figuring out what to do after the prescribed normal course from 0 to 18 which ends at high school. Once you are done with the commonly prescribed course, what do you do?
You can still find yourself while working a job. No one ever says that you have a better shot of figuring out what you want to do because you are in college. You can still read, meditate, and explore different interests and hobbies without stepping foot in a college campus.
Party And Have Fun
Some people might want to go to college just to get away from the parents and to let loose. There are many other ways of having fun and partying without having to pay the exorbitant tuition cost.
You can still meet up with friends, go out at nights or weekends and enjoy parties. There are no rules which state you can only have fun while in college.
To Obtain An Education
There are so many ways now to obtain knowledge on a subject you might be interested in. The internet is a universe of resources.
There are online videos of lectures from different universities you can view for free. There are public libraries and bookstores you can frequent to go in-depth on a variety of topics through the pages of books.
You can attend museums, zoos, aquariums, farms, and stores to learn more about a topic or get some hands on experience.
Today, there are just too many ways to obtain an education and colleges do not have a monopoly on it.
Meet People And Develop A Bond
There are many places to meet people and form long lasting bonds and friendship. College isn’t the only place.
There are clubs and get together/meeting groups for all sorts of interests and hobbies. You can also chat up people at the gym while working out, or at the local eatery.
If this is one of the reasons to attend college in your mind, you can basically replicate different ways to meet a lot of people without having to spend a lot of money.
Is College For Everyone?
Only about a third of all Americans over the age of 25 graduated with a degree from a 4 year college. That means the majority of Americans did not graduate or pursue college.
It also means college isn’t for everyone. In fact, based on the fact that 2/3 of the American population does not have a college degree, college is not for the majority of Americans.
People can be successful without going to college or graduating from college. To cite some extreme examples, look at celebrities, athletes, and very successful business leaders.
Making The Right Choice
Now, this post might make it sound like I am not a big fan of college. That cannot be further from the truth.
I do believe a college education can provide immense value. But it goes back to the point I am making with this post – college is only worthwhile if the return on investment is good.
What do I mean by that? Obtaining a college degree makes it easier to earn a high income, above and beyond the median income cited by BLS above.
You need to enter into a profession which pays a higher amount of money then the “average” jobs out there with prospect for greater income growth in the future. That is the only way college makes any sense.
For instance, pursuing jobs in the STEM (science, technology, engineering, and mathematics) field would be good. A lot of high paying STEM jobs require at least a Bachelor’s degree.
Therefore, if you go to college to obtain a degree which can help you land a STEM job, then it makes great sense to go to college.
You really need to research the income potential of your desired profession before pursuing a college degree. That is a must now given the high cost of tuition and the crippling effect of student debt.
If you are a parent, please have a sit down with your soon to be high school graduate and have the talk. Walk them through the analysis above and make sure your kid understands the high cost of college. That high cost can only be justified if she graduates to a high paying job.
A job that pays a medium income does not justify the high cost of college or even in attending college in the first place.
If you are currently a college student, examine your major and potential career choice. Research and review how much graduates in that profession make and the future income growth potential.
If it isn’t high, then either seek another major which can help you obtain a higher paying job or drop out of college and start work immediately.
College should purely be a financial choice!
To the audience: Do you agree college should purely be a financial choice and you have to look at the return on both time and cost of tuition? Are there other considerations of attending college that can only be obtained by going to a higher place of learning versus having a less expensive alternative? What was your top reason for attending college or skipping college altogether?
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Many people work hard to better their physical and mental health. What about their financial health?
I started this blog back in 2019 to help people better their financial health as well.
My financial journey began with tens of thousands in student loan debt. Over the span of 20 years, I am close to achieving financial independence.
I truly believe anyone can get to strong financial health. Hopefully, this blog can help you on your financial journey to greater wealth and financial independence.
You can read more about me here.
Thank you for visiting. Come again soon!
Really great analysis SOM. I was shocked at the numbers the way you laid them out with the high school kid winning every time.
I agree that the only way to flip the script is to go into a high income potential profession. Going to college and being a history major is not going to cut it I am afraid.
I have read previous posts on the internet about how a UPS driver comes out ahead compared to a physician due to the exact same reasoning of opportunity cost. The effect time has on investing is a huge hurdle to overcome especially when not only are you not investing, you are actually putting yourself more in debt and delaying entry into the workforce when you choose medicine as a profession.
Regarding your point about physician pay, I remember watching a documentary on leverage buy out firms years ago. If I remember correctly, there was a commentary about how doctors, lawyers and financial professionals all made roughly the same amount of money in the 1960’s. But over the next 20 to 30 years, lawyers (especially corporate finance) went up significantly in pay and the compensation of financial professionals (corporate raiders and such) went through the roof. Physician’s pay did not have that explosive growth.