College as an Investment in Self

Following up to yesterday’s post, I want to look at college simply as if it was an investment.

Let’s use a nice round (and probably average) tuition number of $50,000/year. In a typical 4-year undergraduate degree, the piece of paper at the end costs $200,000. For simplicity’s sake, we’ll exclude living expenses, food, that semester in Florence, and the other fringe expenses. Let’s just talk about tuition.

The very idea of college is that because of your advanced degree, you are more ready to actively participate in the work force. The degree is the system’s designation that you have successfully proven your expertise in whatever subject matter you chose. Says it right here: I’m an expert. So, you spend $200,000, and now in theory, you are more valuable to an employer. You are going to use your expertise to benefit a company or organization, or build your own, and thus, there will be a return on that investment.

(Math and investment experts be warned: I’m using rough math, estimates, not considering market conditions, inflation, risk underwriting or any of the other variables that would come into play. Just using simple math to make a simple point). If you took that $200,000 and put it into a low-risk investment, you can conservatively earn 5%. A 5% return over a 10 year period on a $200,000 investment would be worth roughly $325,000, or a $125,000 gain. Simple math, you have to make a net living of $12,500 more than you would have made without college, per year, for 10 years, to justify the expense. This is attainable. Using real world numbers, without college, you would have gotten an entry level, low-education required job, maybe for $10/hr, or $20,000/year. But, because of college, you started in a management role or higher education job in which you earned at least $32,500/year. Worth the investment.

Now, this is assuming you have the $200,000 in cash, and are able to invest it in yourself. Let’s pretend you don’t. Let’s pretend that in order to go to the 4 year institution, you need to get a $200,000 student loan. Loan term of 10 years, 7% interest rate, paid on time (and not including any other loan fees), your actual investment in yourself including interest is $276,000. At 5%, 10 years later, this is worth $420,000, a $164,000 gain, and now, you need to make $16,400 per year more to justify the expense.

I’m oversimplifying a ridiculously complex issue, but I’m doing so to get you to think through this from an investment standpoint. Especially when you are 18 years old (normal age of a first year freshman in USA), it can be hard to look at your education as an investment. Most kids have barely had a car loan, let alone be able to understand the complexity of education debt.

If these numbers were clear, I feel it would cause people to pause and think about either their field of study, or going to college all together. Again, for some people, this makes sense. If you are in a position to pay for college for whatever reason, and you will not be burdened by the interest of a significant loan upon graduation, you should take advantage of that outstanding opportunity. If you are hoping to be an investment banker or a lawyer, and your earnings upon graduation will blow the numbers in this article out of the water, you have to go to college. But, here’s a real world example I just came across that to me makes no sense:

Someone has a lifelong passion to be a school teacher. They apply to a number of schools and they get into Columbia, which is outstanding and something to be proud of. But, this person can’t afford Columbia. (I’m not sure of the exact tuition, it was north of $65,000/year). So, she is going to have to take out loans.

The strange thing about the world of public education (a different can of worms for a different time) is that no value is put on the where you receive your education from, just that you receive it. If two teachers are in their first year of teaching in the same public school system, one went to Columbia, the other went to a low-cost state school but both graduated with the same level degree, both are making the same salary. From where I sit, this makes zero economic sense. Can you argue passion? Certainly? Can you argue pride? Certainly. Can any of us find reasons to justify going to Columbia? Absolutely. But, we also have to be realistic about the outcome. If you are comfortable with an extra $65,000/year in education debt, go for it. If you are not, SUNY is free if you live in New York. Go there.

Here’s the world I imagine: we don’t need the University. The University is, at it’s simple core, a brand. The money you pay for that brand goes to cover overhead, maintenance, capital expenses. In fact, your tuition check most likely barely comes close to covering your cost to be on campus. Very little of that allocation is the actual professor standing in front of the class, sharing his or her knowledge with you. What if we get back to the simplest form of education? What if we gave a person with knowledge money in exchange for that knowledge? No middle man. You know a thing, I want to know a thing, here are some dollars, please teach me that thing. If you gain the knowledge at a lower cost, and that knowledge makes you more valuable to the job marketplace, isn’t it that simple? Does it need to be more complex than that?

Yesterday I said college doesn’t work. That was extreme. It does work, it work’s well (thanks to my friend Chris White for pointing that out) for many. But it doesn’t work well for everyone (or maybe even, most?). The economics of today’s University experience make it especially hard to justify the investment in one’s self. Do you have student debt? Did you? Is it choking you? Or did you find the investment to be worthwhile and proving a return?