I was surfing YouTube the other day and I caught a clip from the Ellen show. She was giving money to a needy couple that was living with the wife’s parents because they couldn’t afford a place of their own. Both had college degrees and were working. However, the jobs were minimum wage as nothing else was available.
On top of that, student loan repayments put a big dent in their cash flow. The clip reminded me someone I know in New York (with a 5-year architectural degree) who has $100,000 in student loans and now works as a bartender.
Subsequent to my video viewing I came across a Wall Street Journal article discussing why 52 percent of U.S. companies report having difficulty finding the employees they need. About 47 percent of these businesses “blame prospects’ lack of ‘hard’ job skills or technical skills.” This statistic seemed contrary to the rising ranks of unemployed college graduates — unless colleges are not preparing students for the real world. So with student loan levels creeping up and employment prospects questionable, is a college degree still worth pursuing?
ROI, return on investment, is a common analysis used in finance. Basically it answers the question “should I buy” with a calculation of what will be received in return for the act of purchase. Since sending a child to college is the act of buying a degree, ROI analysis can be applied to its cost and presumably a lifetime of returns to its holder.
One important variable in a college degree ROI calculation is lifetime earnings. Does having a college degree result in more income? The simple answer used to be yes. According to one widely accepted estimate, a college degree earns its holder about $1 million more than just a high school degree. Moreover, even though college graduates are currently suffering higher unemployment than the historical norm, those without a degree suffer more, as the recent recession has shown. But the million dollar figure is faulty. It overestimates benefits by neglecting costs.
Every parent knows the costs of a college education differ widely depending on the school choice. In a general classification, the biggest cost differential is found in states vs. private colleges. A 4-year degree from a top 10 state college costs about $90,000 compared to almost $200,000 from a top 10 private college. These figures do not include interest cost on debt to finance the degree.
So immediately the $1 million lifetime differential is reduced. In addition, there is the opportunity cost of spending four years in college while the high school graduate is working. This can subtract another $100,000 from the differential.
The differential can be further squeezed by a high school graduate getting additional education. Just having some college can add $200,000 to lifetime earnings. Obtaining an associate’s degree can add another $200,000. The benefit of a 4-year college degree is still evident. But continuing education can reduce the gap. Be aware that these are aggregate statistics. Individual experiences can vary widely. Neither Steve Jobs nor Bill Gates finished college.
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