While the thought of incurring student loan debt causes many prospective students to reconsider pursuing a post-secondary education, the impact of a degree still outweighs the pain of loan debt on future financial well-being. A college degree represents a good investment in your future earnings. The financial return over a lifetime makes a college education a good investment.
Remember, college graduates, on average, earn 84% more over their lifetime compared to high school graduates. While the stories of successful college dropouts like Bill Gates further the notion that a college degree isn’t worth the time or money spent, those who enter the workforce without a degree face an uphill battle. Once hired, non-titled employees may view their lack of title as an obstacle to future promotions and raises.
So how do you know if college is worth it? This is how to dive in and see.
The value of the university
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 are trying to learn skills that will earn them more money after graduation.
Wait? That sounds like an investment. Because it is!
Students are paying money up front, to see a return on investment after graduation. It’s also part of the ongoing student loan crisis. Too many students borrowed money for this investment, and the return on the investment is not what they expected (making it difficult to pay off the student loans they took out).
What does the data show about the value of college?
Well, one of the most cited data that shows the value of the university comes from the Social Security Administration.
“Men with bachelor’s degrees earn approximately $900,000 more in median lifetime earnings than high school graduates. Women with bachelor’s degrees earn $630,000 more. Men with graduate degrees earn $1.5 million more in median lifetime earnings than high school graduates. Women with graduate degrees earn $1.1 million more.”
That’s a great data point, but it leaves out a key factor. How much did that person pay for that title?
Sounds amazing to suddenly make $900,000 more in your lifetime (which is about 45 years of work after you graduate college). But what if you paid $900,000 for that title? Worth it? Of course, no.
And that’s the crux of the matter: What is the value of the highest lifetime earnings in today’s dollars?
The net present value of lifetime earnings
This is where the eye opens. It can also be a bit tricky since we have to do some estimation, like rate of return/inflation. We also have to realize that not everyone is the same, not all careers are the same, etc.
But it’s nice to have some data points. Let’s calculate the net present value of $900,000 and $630,000 over 45 years (that means you graduate college at 22 and work until 67). We will use a rate of return of 5% for our calculation.
Net Present Value for Men ($900,000): $100,167
Net Present Value for Women ($630,000): $70,117
With this incredibly rudimentary calculation, we can quite easily see the value of the university. For a man, if he spends $100,000 on his college education, he will break even throughout his life. If you are a woman, that number is $70,000. If he spends less, he starts to have a positive ROI, if he spends more than that, he has a negative ROI.
However, this is where it gets a bit scary. What if we use a more reasonable rate of return of 8%? The value of the university decreases significantly.
Net Present Value for Men ($900,000): $28,195
Net Present Value for Women ($630,000): $19,373
The truth is that the value of the university probably falls somewhere between these two calculations. But you can see that it really starts to NOT WORTH IT if you spend too much money.
So how can you personally factor this into your college decision?
Calculation of the ROI of your university
The key to deciding if college is worth it is simply calculating the return on investment (ROI). Specifically, we are going to look at how much the borrower must pay for college.
If you can pay cash for your degree, it doesn’t matter if it’s worth it because you’re buying a luxury you can afford (yes, I know education shouldn’t be seen as a luxury, but paying cash can be). It only matters if you are going into debt for a student loan.
It’s like buying a car to go to work. The goal is to work in order to earn money and you need a car to get there. You can buy an old car really cheap – it gets you from home to work. Or you can buy a new Mercedes. Both serve the same function, but one is much cheaper and has a better return on investment. But if you have that much money and the price doesn’t matter, buy the car you want. But most Americans aren’t in that situation, so we need to think critically about costs and return on investment.
So the name of the game is to only borrow as much as it makes financial sense. And that amount is: Never borrow more than your expected first-year graduate salary.
“Never borrow more student loan debt than you expect to earn in your first year after graduation.”
So if you plan to become an engineer and expect to earn $60,000 per year, don’t borrow more than $60,000 in student loan debt. If you want to be a teacher and only expect to earn $38,000 per year, don’t borrow more than $38,000.
It’s a very easy rule to understand, but it can be hard to follow.
There is also a lot more research going on today to understand ROI. For example, him Foundation for Research on Equal Opportunities A recently released load of data calculated the return on investment on 30,000 bachelor’s degrees from different schools and programs. You can see the real answer to whether college was worth it.
Related: Where to apply to college (Find the financial and academic fit)
How to understand what you will earn after graduation
This can be difficult, but it is where you need to start. What do you want to do after you graduate and how much will you earn?
When you’re 17 or 18, it can be impossible to tell. But you can get a ballpark (and you should, especially depending on the field you want to get into). remember, just 27% of graduates have jobs related to their major at the universitybut that’s a good baseline of where to start.
Once you have a ballpark, you can build a buffer around it. Do you want to go into education? See what low-level teachers in your state are doing. Marketing? See what marketing jobs are available? Do you want to be a doctor? Well, I hope you’ve talked to some doctors.
If you don’t know where to find salaries, check out sites like Glass door Y Indeed. Both sites have salaries and company reviews, which can be helpful in understanding a little more about the great companies in the industry you want to get into.
Reduce tuition costs
Research on state school tuition as well as other lower cost programs. While the benefit of an Ivy League education could pay off in networking and career opportunities, there’s no point in spending too much on those benefits. Find lower tuition options and well ranked.
You can also opt for a hybrid of starting at a community college (which is free in 30 states) and then transferring to a state school after meeting your general education requirements.
Look for financial aid and scholarships. There is money available for students of all abilities and financial backgrounds. With a little legwork, it is possible to reduce inflated school fees with a minimal cash investment. Don’t rule out working for a university—employee benefits often include free tuition along with comfortable salaries.
Choose to live at home or rent a low-cost apartment off campus. Reducing or eliminating room and board expenses can help limit the amount of student loans.
Related: The Ultimate Guide to College Budgeting
speed up your studies
Take AP courses in high school or try entry-level courses with options like CLEP. Choose a major and stick to your core studies to avoid wasting precious tuition money on superfluous classes. Opt to take lower-cost general education credit hours at a community college. Get ahead of your investment by graduating early and on time. Extending your stay in school only increases the debt and postpones your ROI.
In my case, I took as many AP courses as I could and I took the AP exam every spring. As a result, I was able to start college as a sophomore due to the number of credits I received for my AP classes, and I was able to graduate early (even though I changed my major). AP courses were the key to graduating early and saving a bit on college costs.
work through college
Don’t be afraid to go out and work during school. Beyond the fact that you get paid and can use this money to offset the costs of your college education, working gives you amazing skills that you can transfer to any job after college.
For many college students, working in a retail store or restaurant is a flexible way to find a job while still being able to balance their school schedule.
Conclusion: Is college worth it?
Is college worth it? Maybe.
As with any investment, you won’t know until after you make it and start making a profit. But you can protect yourself by spending as little up-front as possible.
For example, mitigating the amount of student loan debt you carry with you as an adult creates a better foundation for future investments and increased personal wealth.
While there are many paths to success, a college degree is still a good option for those looking to earn a solid living and live in financial comfort. Return on investment depends on students managing money wisely, making good career decisions, and backing up their degrees with discipline and work ethic.
While incurring loan debt puts students behind workers without a degree for the first few years of employment, the earning potential of those with college degrees far outweighs those without. However, it only makes sense if you don’t spend a lot of money on that college degree.
What do you think? Is it worth the investment in the university?
