While the thought of taking out student loans makes many prospective students reconsider post-secondary education, the impact of a degree still trumps the pain of loan debt on future financial well-being. A college degree is a solid investment in your future income. The financial return over a lifetime makes a basic education a sound investment.
Keep in mind that college graduates earn, on average, 84% more over their lifetime than just high school seniors. While stories of successful college dropouts like Bill Gates encourage the notion that a bachelor’s degree isn’t worth the time or money, those who enter the job market without a degree face an uphill battle. After hiring, employees without a degree may find their lack of a degree a barrier to future promotions and raises.
So how do you know if college is worth it? Here’s how to dive in and see.
The value of the college
Why do people go to college? There are many ideals – learning, networking, building lifelong relationships. But the truth is – college costs money. And most students go to college because they’re trying to learn skills that will help them make more money after graduation.
Wait? That sounds like an investment. Because it is!
Students pay money upfront to see a return on investment after graduation. It’s also part of today’s student loan crisis. Too many students have borrowed money for this investment, and the return on the investment does not meet their expectations (making student loans difficult to repay).
What does the data show about the value of college?
Well, one of the most cited data showing the value of the college comes from the Social Security Administration.
“Men with a bachelor’s degree earn about $900,000 more in average lifetime earnings than high school graduates. Women with bachelor’s degrees earn $630,000 more. College-educated men earn $1.5 million more in median lifetime earnings than high school graduates. Women with college degrees earn $1.1 million more.»
That’s a great data point — but it omits a key factor. How much did this person pay for this degree?
It sounds amazing to suddenly make $900,000 more in your lifetime (which is about 45 years of work after graduating from college). But what if you paid $900,000 to get that degree? Is it worth? Of course not.
And that’s the heart of the problem – What is the value of the increased lifetime income in today’s dollars?
The net present value of lifetime earnings
This is where it gets eye-opening. It can also get a little messy as we have to make some guesses – such as: B. the rate of return/inflation. We also need to be aware that not all are created equal, not all careers are created equal, etc.
But it’s good to have some data points. Let’s calculate the NPV of $900,000 and $630,000 over 45 years (that means you graduate from college at 22 and work until you are 67). We use a response rate of 5% for our calculation.
Male NPV ($900,000): $100,167
Net Present Value for Females ($630,000): $70,117
With this incredibly rudimentary calculation, we can see the value of college fairly easily. If you spend $100,000 on your college education for a man, you will break even for the rest of your life. If you are a woman, that figure is $70,000. If you spend less you have a positive ROI, if you spend more you have a negative ROI.
This is where it gets a bit spooky though. What if we used a more reasonable 8% response rate? The value of the university drops significantly.
Male NPV ($900,000): $28,195
Net Present Value for Females ($630,000): $19,373
The truth is that the college’s value probably falls somewhere between these two calculations. But you can see that if you spend too much money, it really isn’t worth it anymore.
How can you personally factor this into your college decision?
Calculate your College ROI
The key to deciding if studying is worth it is to simply calculate your return on investment (ROI). Specifically, we’re going to look at how much you should pay for college as a borrower.
If you can pay for your degree in cash, it doesn’t matter if it’s worth it because you’re buying yourself a luxury you can afford (yes, I know education shouldn’t be viewed as a luxury – but paying with cash is it may be). It only really matters if you’re taking on student loan debt.
It’s like buying a car to get to work. The goal is to work to make money and you need a car to get there. You can buy a really cheap old car – it will take you from home to work. Or you buy a brand new Mercedes. Both perform the same function – but one is much cheaper and has a better ROI. But if you have that kind of money and price isn’t an issue, buy whatever you want. But most Americans aren’t in that situation — so we need to think critically about the cost and return on investment.
So the motto is to only borrow as much as it makes financial sense. And this amount is: never borrow more than your expected first-year postgraduate salary.
«Never take on more student loans than you expect to earn in your first year after graduation.»
So if you plan to be an engineer and expect to make $60,000 a year, don’t borrow more than $60,000 in student loan debt. If you want to be a teacher and only want to make $38,000 a year, don’t borrow more than $38,000.
It’s a very easy rule to understand, but it can be difficult to follow.
There is also a lot more research today to understand ROI. For example, the Foundation for Research on Equal Opportunity recently released a series of data that calculated the ROI of 30,000 undergraduate degrees from different schools and programs. You can see that college was really worth it.
Related: Where to Apply to College (Find Financial and Academic Eligibility)
How to understand what you will earn after graduation
That can be a tough question – but this is where you need to start. What do you want to do after graduation and how much will you earn?
If you are 17 or 18 it may be impossible to know. But you can get a ballpark (and you should, especially depending on which field you want to get into). Keep in mind that only 27% of graduates have jobs related to their college major, but that’s a good base from which to start.
Once you have a baseball field, you can build a buffer around it. Do you want to go into training? See what low-end teachers are making in your state. Marketing? See what Marketing jobs are available? do you want to be a doctor Well I hope you’ve spoken to some doctors.
If you don’t know where to find salaries, check out sites like Glassdoor and Indeed. Both sites have salaries and company reviews – which can be helpful for learning a bit more about big companies in the industry you’re looking to get into.
Research into state tuition as well as other lower cost programs. While the benefit of an Ivy League education could pay off in terms of networking and career opportunities, it doesn’t make sense to overspend on these benefits. Find well-ranked, lower tuition.
You can also choose to do a mix of starting at a community college (which is free in 30 states) and going to a government school after completing your general education requirements.
Seek financial aid and scholarships. There is money for students of all abilities and financial backgrounds. With a little legwork, it’s possible to reduce bloated school fees to a minimal cash investment. Don’t rule out working for a university, often employee benefits include free tuition in addition to comfortable salaries.
Choose to live at home or rent an affordable off-campus apartment. Reducing or eliminating room and board costs can help limit student loan amounts.
Related: The Ultimate College Budget Guide
Accelerate your studies
Take AP courses in high school or try entry-level courses with options like the CLEP. Choose a major and stick to core studies to avoid wasting valuable tuition funds on irrelevant courses. Opt for cheaper general education credit hours at a community college. Get ahead of your investment by closing early and on time. Extending your school tenure will only increase debt and shift your ROI.
In my case, I took as many AP courses as possible and took the AP exam every spring. As a result, the amount of credits I received for my AP classes allowed me to start college as a sophomore, and I was able to graduate early (despite changing my major). AP courses were key to graduating early and saving a bit on college expenses.
Work through college
Don’t be afraid to go out and work during school. Aside from the fact that you get paid and can use that money to help offset the cost of your college education, the work gives you amazing skills that you can transfer to any job after college.
For many students, working in retail or a restaurant is a flexible way to find a job while balancing their school schedule.
Conclusion – Is the course worth it?
Is college worth it? Perhaps.
As with any investment, you won’t know until after you’ve made it and start realizing the returns. But you can protect yourself by spending as little as possible up front.
For example, if you reduce the amount of student loan debt you carry into adulthood, you create a better foundation for future investments and growing your personal wealth.
Although there are many paths to success, a bachelor’s degree is still a good option for those who want to earn a solid living and be financially comfortable. The return on investment depends on students managing money wisely, making informed career choices, and backing their degrees with discipline and a work ethic.
While taking on credit debt leaves students behind ungraduate workers in the early years of employment, the earning potential of those with college degrees far outstrips those without. However, it only makes sense if you don’t spend a lot of money on the bachelor’s degree.
What do you think? Is College Worth the Investment?