How much is a college degree worth?

December 8, 2011

In the past, I've questioned whether college is worth it.  It was mostly a subjective look at it, but now I'm going to review the numbers to try and validate my assumptions.

The US Bureau of Labor Statistics (BLS) compiled wages from the last five years to show salary averages by education type.  At a high level, it's clear higher education enables you to make a lot more money.  However, what does it actually look like over the course of a life time?

First, let's look at wage growth over the next 40 years.  I'll use a 3% wage growth just for comparison's sake; some people will experience higher growth and some will experience lower.  For workers with a Bachelor's degree or higher, their salary would grow from $59,124 today to $187,247 in forty years.  For workers with less than a high school diploma, their salary would go from $24,316 today to $77,010 in forty years.

Percentage growth is very deceptive because even though both groups of workers' salaries are growing at 3%, the dollar amount between the two changes drastically.  It's easy to see how the middle class is disappearing when you compare these stats.  They start at a gap of $34,308, and balloon to a gap of $110,237 after forty years.

Next, we'll look at total income earned over 40 years for each education demographic (adjusted at the same 3% wage growth).  For workers with less than a high school diploma, their cumulative salaries equal  $1.83 million.  However, for workers with a Bachelor's degree and higher, their cumulative salaries equal $4.45 million.  That's a difference of $2.6 million in wages over the forty year period. 

If you compare the cumulative salaries of high school graduates to college graduates, the divide narrows to $2 million.  So that means a college degree is with $2 million more than a high school diploma, right?  Well, it depends on how much you pay for your degree.

ALERT ALERT ALERT

Big stuff to follow… you won't see this anywhere else…

If you assume $100,000 of debt to receive a college degree, it might be better just to borrow $100,000 and put the money in the stock market!  Now, I still think it's better to college, but this just an interesting experiment.

Initial investment:  $100,000

Growth rate:  8%

Investment length:  40 years

Value after 40 years:  $2,172,452

Remember before when I said the difference between a high school diploma and college degree was $2 million?  Well, if you borrow $100,000 at the age of 20 at a low interest rate, and could guarantee an 8% return over the borrowed amount, and averaged the same cumulative wage as other high school grads, you could have just as much as a college grad in 40 years!!

 No College degree 

$100,000 Investment + high school salary

$2,454,462 (High school salary ) + $2,172,452 (investment return) = $4,626,914

College degree

$4,458,024 (Lifetime college salary)

The high school grad with a $100k investment wins!!!  The next question would be who is more fulfilled, but I'll save that for another time.

The experiment is very theoretical, but not too far out of the norm.  There are some variables that have to be accounted for (such as borrowing the money at a low interest rate), but they're possible.  The point here is a college degree purchased fully with student loans may not be worth it.  The average student loan debt was $23,000 in 2009, so it would only be the extreme debtors who might take this experiment serious.

This also reminds me of entrepreneur Peter Thiel who's giving high school graduates $100,000 to bypass college and start a company.  The whole point of this experiment is to question if a college degree is worth it.

As I discuss in an earlier post, there are many things we don't learn from school.  Even saying that, a college degree is still worth it for most young adults because they can make $2,000,000 more over their life time.  However, if they're going into deep debt to pursue it, I think they need to question if it's really worth it.  What do you think?

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