Time to challenge one of the sacred cows of today’s modern society: Everyone should go to college. “Is College worth it?” has increasingly become a talking point as college debt skyrockets into the stratosphere (passing $1.6 Trillion in 2020). People are graduating with $30k, $60k, $100k+ of debt and very little to show for it when they get into the real world.
For years, college has been pushed as a right of passage in America to the point that many students don’t question the actual value they are receiving. All we know is that we need to go to college.
Full Disclosure: I have degree in Engineering; I do not regret it, and for my situation it has been instrumental in my FI journey. Even with this understanding, I am open to an investigation of what the numbers show.
How Did We Get to This Point?
My personal belief is that there are a few issues propagating the student debt crisis:
- Parents want better for their children so they push them in the college direction.
- College is being portrayed as a necessity to ensure a good life.
- Social pressure even imposes a sense of shame for not going to college.
- Students graduate from High School without a plan and default to using student loans (and let’s be honest, many of these loans go to fund other lifestyle choices that are above and beyond the education requirements).
Here are a couple of pros and cons that I have seen:
Is College Worth It? (Pros’s)
There are some professions that can prove to be very lucrative in the long term
- One of the main reasons to go to college is the pursuit of a high paying job. However; the fact of the matter is that not all college degrees come with high paying careers. The range of money for graduates varies widely.
- A degree does not guarantee a job. I have several friends that ended up having to find jobs that had nothing to do with their degrees. Granted, they are doing well for themselves but still, they did not require any education for what they are doing currently.
Jobs that require degrees generally have better benefits for their employees
- I am not sure if this is a true statement, but it is something I have seen while reading through articles. This is something important to do more research on, especially if your family has a history of health problems. My only contribution to this topic is that I work for the same company as thousands of people without degrees. Guess what? We all have the same benefits, so I am not sold on this as a fact.
There are an increased number of jobs in the workforce that require degrees
- There are also a lot of jobs that only require trade school, a certificate, or even an associates degree.
Is College Worth It? (Con’s)
Going to college does not guarantee graduating or getting a job
- We already covered this a little bit above. I know several people who are currently in a line of work that has nothing to do with their education. AND they are doing great.
- I also knew people that dropped out after a couple years for various reasons.
Many professional positions are salary, which could require working much more than 40 hrs without additional compensation
- This is a huge one for me. Many professional jobs (college educated jobs) fall into a category of Exempt Employees. To summarize, there are many professionals that do not get paid overtime, which means that they can work 50 and 60 hr work weeks without receiving any additional income. On top of this, hourly workers are actually compensated at time and a half for hours over 40. This can quickly erode the pay gap between exempts and non-exempts. Look at this example of an exempt and a non-exempt who both make a target of $40k.
College can delay investing due to being in school and afterwards having to pay off student loans
- Student loans have to be paid back. This delays or reduces the available income that could have otherwise been utilized for investing.
Where am I going with this?
Think back to when you were in high school. Why did you choose the path that got you here? Was it chance? Did you think it would make you the most money?
The goal should be to understand “how do we maximize your life or how to optimize the journey?” From a purely financial standpoint, the FI community understands that this means positioning yourself to be able to take full control of your life and achieve Financial Independence.
Let’s go back to my post about time and money. If we had infinite time on this planet, then decision would be much simpler but we don’t. We have to look at this narrow window of time that we have and use it to the best of our abilities. When taking that into consideration, what effect could college have on achieving FI:
To summarize this schematic: the more you can save, for longer, at higher rates of return, the more money you will have. Yeah, this is pretty common-sense stuff.
College is trying to provide a level of knowledge to open the door to higher paying jobs. The cost to you is time and money. So, all other philosophical arguments about bettering yourself/college experience/networking/etc. aside, it comes down to:
Is it worth delaying the ability to earn income/invest while also possibly going into student loan debt for the potential that one day I might make more money?
I looked at 5 different professions that I am somewhat familiar with. They were selected because they are common in the workplace and are easy to try to fact check/model.
- Single filing a standard deduction for federal tax purposes (because we are taking the view of a high schooler trying to decide what their next step should be).
- No other taxes accounted for (State taxes, Social Security, etc), Why? Simplicity…I will make my spread sheet available if someone else wants to upgrade it with added complexity. That would be pretty cool.
- I decided to run this under a Dave Ramsey debt snowball. This maximizes the pain of having student loans from an investment time standpoint but is how I would probably attack it because I personally cannot stand having debt. This means that upon graduation, 100% of the money beyond “Monthly Expenses, tax, etc” goes to student loans. Investing only occurs once student loans are paid off. In fairness, I may come back at some point with different payoff strategies. Anyone interested in that should note that while you are earning higher returns in the market, you are still paying interest on your loans so it is not a one for one comparison.
- No Money is made until after graduation
- Education is 100% paid for by student loans
- No overtime is accounted for when working
- No extra benefits are accounted for such as pensions or company contributions to retirement
- I am pretty sure this is all of the assumptions…
I also looked at scenarios based on cost of living. Scenario 1: assume everyone has the same cost of living of $2500/month. Scenario 2: everyone’s cost of living adjusts to a 50% savings rate.
1: All People Have the Same Cost of Living
Cases 1,2 &3 are all college degree jobs and Cases 4&5 are jobs that require no degree. I also specifically chose teacher and chemical operator because they have similar starting salary but one has the advantage of no degree required.
Under this scenario, the chemical operator holds the lead for the first 10 years because they benefit from saving right out the gate. The engineer then takes the lead because she has a much larger income and higher savings rate. The doctor eventually passes the operator, but it takes 19 year due to the extensive amount of time and student loans that have to be paid off. The teacher eventually passes the worker but he can never catch the chemical operator who also started out at $45k. This is because the operator had raises and compounding interest in their favor while the teacher was still in school or paying off loans. The worker lags on the lower side due to the reduced savings rate in this scenario.
2: Cost of Living is Adjusted Based on a 50% Savings Rate
Part of the reason I didn’t post this a few days ago, is that when I saw this result, I thought I had made a mistake (I am not saying there is definitely not a mistake but I cannot find it lol).
What just happened?!?!?! Our two high school grads just smoked all of their “highly educated” friends. This is the amazing power of time and compounding returns…. This is the real cost of college. So, ask yourself again “Is college worth it?”
Just to be clear, I am in no way saying that college is worthless; but, I am saying that college should not be the default path. It comes at a huge cost and the full extent of it is not apparent until you look at a 20+ year horizon. Time and compounding returns are huge levers and should not be taken lightly.
There are a lot of assumptions in this model, and it is not a one size fits all, but after running through this exercise there are a few actions steps that I have noted for my own Children:
- If they go to college, they need to define career goals with a solid payback identified before ever applying.
- Minimize college costs and time by all means necessary (no debt) – Scholarship applications will be a requirement throughout high school. I just picked up a copy of Anthony ONeal’s book. If it is any good, I’ll let you know.
- Minimize time in college by dual enrolling in high school and utilizing CLEP exams.
- Consider working while in school to at least start some form of investing ASAP.
Until next time – continue to Choose Beta,
Photo Shout Outs:
Photo by Vlad Kutepov