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The Biggest Gamble of Your Life (Is College Worth it?)

In 2005, young people (ages 18-25) in the US gambled $67 billion. Not in Vegas or online poker rooms, but on a betterment program called college. Their hope is that the monies they are spending will allow them to earn more money over their lifetime. Many are paying for this wager by amassing a mountain of debt that will take years to pay off. Is it a good wager? Conventional wisdom says so, but with $67 billion on the line (and that's debt accumulated in just one year by college attendees) we should have more than conventional wisdom or parental pressures to guide the way to smart economic decisions. REEFís economic analysis shows that college is a financial mistake for more than half of the American young people today. Shielded from scrutiny in this transaction by an assumption of 'public good' are universities and college lenders who many expect to provide guidance to these young people. While the data hints at ways for some individuals to improve the odds of a positive financial outcome, half the people attending college should hear the frank counter-intuitive advice, "Don't go to college."

The analysis begins by assessing a college education purely as a monetary investment. Undoubtedly, there are other benefits beyond money to attend college, but it's such an enormous economic decision that it seems foolish to not fully understand the financial ramifications and use that as a primary factor in the decision process. Overall, college grads do have higher earnings than non-grads, but that's only part of the equation. A deeper analysis looks at the costs of acquiring that degree and the monies including interest charges which need to be repaid. (At the end of this piece is a complete listing of the data sources used and a walk through of the calculations.) Using a 40 year time career, here is the total return which look at earnings, college expenses and interest.

Return on College Investment
Initial Investment (college expenses)
Earnings Over 40 Year More Than High School Grad (subtracting out debt servicing)
Effective Interest Rate on Investment

These numbers indicate that a college education is an extremely poor economic investment for private universities and while better for public institutions still poses a meager return when compared to typical investments. To put this another way, most financial planners expect a 7-8% annual return. If you proposed to them a 40 year investment with expected yields of 2-4% on average they would most surely recommend against it. Making matters worse the numbers used for this calculation use average salaries for men. Since average women salaries are less college is even a poorer investment for females.

You may walk through of all calculations and a link to the spreadsheet file, but we want to anticipate some of the criticism likely to be pointed out. First, in our calculation we assumed 100% debt financing. Few students finance 100% of their academic costs. Some have parents that pay all or a portion of the costs. Some qualify for financial aid such as grants. But just because the monies are coming from another source doesn't change the effective return. It just distributes the poor investment to a wider pool of people (taxpayers and parents). Let us examine what the numbers look like if you're lucky enough to have your parents pick up the whole tab, but instead of using the monies to go to college, you invested them in a balanced portfolio which returned 7.5% annually and got a job straight out of high school. For this example we use public University fees ($76,776). Private school would have even a greater disparity.

Lifetime Median Earnings
High School
Public College
Earnings Over 40 Years
Investment Income ($76,776 at 7.5%)

What these numbers indicate is that trust fund babies (or anyone who has parents paying the college tab) would be better off taking their college funds and investing them, bypassing college entirely and working at whatever job they could get without a degree.

There are a few important conclusions to draw from these numbers. Conventional wisdom tells parents they should be pushing their kids to college. For many young people this may be awful advice dooming them to a mountain of debt they will struggle with for decades if not the rest of their life. Exploding costs of higher education tuition (up 35% in the last five years and double digit growth for more than a decade) have far outpaced income growth making a college education a poor choice for half or more of the population.

Private colleges dramatically cut in half the expected return taking it from 4% to 2%. Public Universities are a better financial choice. It is unlikely government schools are run more efficiently, but rather they receive substantial sums of state and federal tax money defraying the cost to the student. In effect, taxpayers are shouldering some of the costs reducing the expense to the attendee.

This doesn't mean college is a bad choice for everyone. The income numbers used were based on median salaries from U.S. Census data. This means that half of the people in the U.S. will do better, but half will also do worse. The problem is that every student will likely think they'll do better than the average. This is the same mentality people go to Las Vegas with and feed the slot machines hoping to win. Deep down they know the numbers are against them, but their emotions override any rational thought and decision making process. Unfortunately we are not talking about a few hundred dollars of blackjack, but tens of thousands of dollars.

At 18, many are ill-equipped to make a rational decision about whether to take on $70,000 of debt pursuing a degree (fortunately college was a tiny fraction of that two decades ago making it a significantly better investment). Universities are increasingly like casinos selling hope with no mention of the underlying economic realities. They receive payment up front and if students depart and struggle to get a high paying job, the university sees no financial repercussions. There are few classes emphasizing learning a specific skill to increase earnings out of college. There are no mentions to avoid majors like art history, medieval literature, philosophy or other degrees with low earning potential. There's little interest in producing graduates with specific skills in high demand since there's no direct financial ramifications. (There are some exceptions like UCSD working with Qualcomm to produce wireless engineers, but this affects very few students.)

A flourishing college loan company makes it remarkably easy to secure tens of thousands of dollars of debt with just a signature. Most concerning is that student loans are not eligible for bankruptcy relief. Make a bad decision starting a business, buying a car, financing a house and you can seek bankruptcy protection. No such opportunity exists for student loans. This financial decision lives with you forever. Once saddled with large debt - job choices, housing choices and even marital options can be greatly impacted. It's nearly impossible to save for a down payment on a house. Jobs have to be evaluated based purely on base salary terms. Prospective spouses may hesitate to get married fearing they will take on the repayment obligations torpedoing their own credit.

Young people have limited capacity to understand the long term implications of their decision, yet it is not in the economic interest of universities or loan companies to disclose these stark realities. Every university and loan company has growth plans achievable only by increased enrollment. This means more kids than ever will be enticed to attend college by hearing all the positives. But today it's a poor economic decision for half the students. There is no data to suggest wages are likely to increase significantly or that college expenses will drop from today's levels, which means we'll see continued deterioration making it a poor choice for even more than half of those attending college.

Few young people will be able to independently assess the value in advance and counter the societal and parental pressures which push them to attend college at any price. It's imperative those with influence over young people make an unemotional analysis prior to college and point them to an appropriate path. For top students this means selecting public schools instead of private. Mediocre students should take advantage of lower cost options like Junior colleges to reduce costs and insure they are benefiting from advanced education. Both should be sensitized to the importance of selecting a high income major to increase the likelihood of a positive outcome. Half the students should be discouraged from attending college and pointed to a vocational career path. The expensive traditional 4 year liberal arts education approach is now failing the majority from an economic perspective. New approaches with a greater emphasis on direct vocational skills are required. Quick realization of the economics of college education is imperative to avoid dooming half a generation of young people to inescapable, life limiting debt.

Copyright 2006: REEF (
Authors: Michael Robertson, Tina Donaldson

Redistribution of this article is encouraged. If written authorization is required contact Tina Donaldson at 858-784-0165 ext. 100

The Math Behind The Numbers Explained:

Median numbers from the 2004 US Census Bureau for male high school and college graduates were used to calculate income levels. Incomes were then calculated over a 40 year period. (The median is the middle number at which half are over and half are under.) US Census data was used rather than numbers published by a university affiliated organization to insure impartial data.

Lifetime Median Earnings
Annual Salary
40 Year Total
College Graduate
$51,110 $1,788,885
High School Graduate
$29,337 $1,202,791

The constructed career model assumed at high school graduate starting salary of $19,994 with 1.8% annual income growth. College graduate starting salary was calculated at $34,145 with an 2.25% annual income growth. The total lifetime income for both high school and college students were in line with US Census data.

College costs and average years to achieving a degree were calculated using College Board School Pricing 2006. (Rounded down to the nearest full year.)

Cost Of Attendance
Annual Costs
Average Years To Completion
Total Cost
Public University
Private University
$30,367 5.3

Federal student loans have a legislated 6.8% interest rate with a maximum amount of $23,000. Private loans range from 12-17%. For this analysis a 12% interest rate was used for all private loans.

Earnings Over Lifetime

Earnings Over Lifetime

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