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Is College Still Worth the Cost?

It’s a complicated question to answer.

From the yes camp, it’s still true that the average pay of college grads is considerably higher than high school grads. But from the no camp, tuition rates are increasing by an average of 8% per year—which means every 8-9 years tuition fees double. Let that sink in for a minute…they double. Combine that with the relatively high interest rates of student loans in the 5-9% range, and clearly the cost-benefit economics of many college degrees is rapidly eroding. The good news is that the numbers vary a lot across majors, schools, and rates/amortization terms of student loans. So the devil is in the details of a particular situation.

The inspiration for writing this post came from a conversation I had with a guidance counselor recently that just about caused my brain to explode. At first we were discussing whether or not college is worth the price, and we generally agreed that in many cases it still is, but in some cases it probably isn’t.

Then I asked him how much time counselors spend with kids helping them to run the numbers and figure out roughly how much their student loan payments will be after graduation, and whether or not the major they are pursuing is going to have a high enough income to pay for the monthly debt service on the loan. His answer was completely insane to anyone with even a basic understanding of finance. He said that they don’t really talk about the economics of school, the cost of loans, or the earnings potential of different degrees at all. Instead they focused totally on aptitude and interest. Leaving the economics of a degree out of the equation is like baking an apple pie without the crust, or the sugar. I mean you can eat it, but it’s not going to be good.

Now don’t get me wrong, aptitude and interest are both super important parts of the equation. If a student is terrible at math then clearly they shouldn’t pursue a PhD in Physics as that’s unlikely to end well. Similarly, if they are introverted and don’t like working with kids then maybe an education degree isn’t the right choice for them.

But providing students with well-rounded guidance on college enrollment and selection of major should naturally include a cost-benefit analysis of the education, estimating monthly loan payments after graduation, how much interest they will pay over the life of the loan, and the average starting salary of graduates of various majors. Not exposing students to that information while they are still in college and can make better, more informed decisions about which major to pursue, well that’s just crazy.

So I told the guidance counselor just that. “It’s totally crazy not to take an hour and run kids through the numbers so they can see on average what their expected earnings and debt service payments will be,” I said.

“That’s not part of our mandate,” the guidance counselor said.

If I wasn’t sitting I probably would have fallen over. At this point I was wild and asked him if he even knew how to calculate the debt service payments? Or if he knew how to use that info along with expected earnings to calculate how much net income a specific degree should on average add to the student’s life over the course of a 40-50 year career? The guidance counselor grumpily indicated that he and his peers didn’t have any training in that area.

And that’s the real crux of the problem here. The people providing young students with guidance as they make their decisions about college don’t have the slightest idea how to financially evaluate the expected returns of a college degree. They know how to navigate the system, help kids with the paperwork, and talk about aptitude and interest, but that’s about it.

Am I way off base here or does anyone else think it’s completely insane that we’re asking these young kids to make $100,000 decisions called student loans, without anyone showing them how to work out the basic economic impact of those decisions? These kids are going to have to spend the first 10-20 years of their working careers paying down the debt they’ve accumulated in school. Do you think maybe it’s worth the effort to expose them to some different ways they can evaluate how their education is going to impact their lives in terms of expected income and debt payments?

Depending on the major, price of the school, whether they do 4 years or 5, and the interest rate and term on the loan, college could be a solid investment or it could be a terrible one that forces students to spend 10+ years digging out of a financial hole after graduation.

Let’s say Student A attends a public university and goes into $50K in debt at 9% interest on a 10 year term to pursue a degree that gets them the average college grad pay of $55,432/year. Since the average high school graduate pay is $33,904/year, that means the degree has increased the starting salary of the student by $21,528/year. And since the debt service payments on the student loan are only $7,600/year, the student is still way ahead of the game right? Correct. In this scenario the education is a good investment.

However, let’s look at another example.

Let’s say Student B attends a private liberal arts college and goes into $150K in debt at 9% interest on a 15 year term to pursue a degree that has very little value in the marketplace (theatre, history, political science, gender studies, et al) and only earns them a paltry $40,000/year. The average high school graduate pay is $33,904/year, which means the degree has increased the starting salary of the student by $6,096. Well that sounds alright, until you realize that the debt service payments on the student loan are $18,256/year. So basically the student is now losing -$12,160/year (for 15 years) more than if they had just not gone to college in the first place. That’s not even including the opportunity cost of not working for 4 years to attend college in the first place, which is a loss of $135,616 in lost wages.

This is a really important math exercise to go through. Yet guidance counselors aren’t doing it, and from what a lot of my tenants, students, and employees tell me, most parents aren’t doing it either.

Look I’m not saying that money is the only factor, or even the most important factor in a student choosing which major to pursue. Aptitude and interest are definitely a vital part of that process. But since the student loan payments are going to follow these kids for 10-20 years, we really should show them how to work through the math so they can make an informed decision and pursue what they think is best for their own future.

This topic is a real passion of mine, so I cover it in greater detail in my Lecture #101: Get Your Money Right.