Who’s getting rich off your education? You, or your student loan company?
In 2012, national news outlets reported the story of Michael Nicholson, who earned 29 higher education degrees and counting since 1960. He’s an extreme (and impressive) example of someone with perpetual student syndrome — folks who aren’t sure what to do with themselves and fall back into the comfort of school. The perpetual student may change undergraduate degrees several times or pursue a graduate to “wait out the poor job market.”
We’re often persuaded that college is the fastest way to increase our future earnings, ease upward mobility, and make us smarter, more well rounded citizens. Unfortunately the conversation stops there.
Is college worth the cost? Are we asking ourselves the right questions before making the plunge into the world of higher education? After all, education should be an investment in ourselves, not in a loan provider. So why do so many students end up with high debts and low incomes?
College: A Safe Investment That’s Easily Ruined
As for college, when we ask teenagers to make decisions that will affect them for decades, we ask too much of them. If there’s one thing I’ve learned its that present-me is an exceedingly poor judge of future-me. This is a pretty universal problem.
When I made decisions about college back in 2007, I asked emotional questions like, “what do I want to do in life?” or “who am I as a person?” Unfortunately, I had no basis to answer these questions. I just assumed that I would be the exact same person today as I was then, with the same goals and attitudes.
Needless to say, this assumption was absolutely wrong. It’s very hard to predict what we will want and believe five years from now. Fortunately, there’s a better way to make decisions about college. As we approach high school graduation, instead of asking “what do I want to do?” we should instead ask “what does the market want me to do?”
Let’s start with an example. Maria is a high school junior who wants to study psychology in college. She also gets high grades in her chemistry classes. Maria wants to attend the University of Texas (my alma mater), a large flagship public university with costs below most private universities but above most 2nd and 3rd tier public schools.
She looks up data about expected costs and returns on her two majors of interest.
|What does the major cost if you graduate in 4 years?||$133,056||$144,048|
|Expected lifetime earnings from 25-65||$900,000||$2,100,000|
|Average income per year||$22,500||$52,500|
|Investment break-even point||5.91 years||2.74 years|
Even though the chemical engineering major is more expensive by nearly $2000 a semester, the advantage is clear. Maria might say, “but I want to study psychology more!” This is not a wise response, because we’ve already seen that Maria’s goals and values are likely to change in unpredictable ways.
Maria might also say, “but I think I can be the best psychologist in my field and beat the average!” This is possible, but if you had to bet money on Maria’s future, what would you do? Even as a mediocre engineer, Maria is more likely to be able to earn a higher income than if she becomes an above-average psychologist.
With a higher income, she can more easily increase her savings rate and retire earlier. If she plans ahead for financial independence, her career may only be ten years long. Then, once Maria is in her mid-thirties and wealthy, she can afford to pursue her dream of studying psychology. It’s a lot easier to “trade down” into a field that the market finds less valuable than it is to “trade up.”
Now we know what criteria we should use to evaluate our higher education choices.
|Bad Question||What do I want to do?|
|Better Question||What does the market demand?|
Remember that the above table assumes that Maria graduates in four years. This is a much more important factor than which of the two majors she chooses. Every year we stay in school longer than needed, we hurt ourselves twice over. First, we decrease our lifetime earning potential by one year’s average income. Second, we increase the expense of our investment, meaning we are literally putting more money in to get less money out.
Finally we should ask, “is college a good investment?” Assuming you graduate in four years, the answer is an unequivocal yes. You’re simply going to make more money if you go to college and graduate than if you don’t. But choosing the right degree is critical.
Graduate School: Bad for Most, Great for a Few
Now we know more about how to make college pay off. But what about graduate school? Given the fact that a college educated person with a steady income can easily retire before their 40th birthday, very few graduate degrees provide a rate of return to justify their cost.
For the same reason you don’t want to stay in undergrad longer than you have to, you won’t want to pursue a graduate degree either. Staying in school tends to decrease our income and increase our debt.
“But I want to go to graduate school for the love of learning!” you may protest. Remember that there are better ways to develop a brighter mind. Community college, MOOCs, intelligent friends with hobbies, and even conferences are better ways to spend your money. High-quality education has never been cheaper.
Graduate school should generally be avoided if you’re looking to achieve financial independence, except in rare cases where your employer will pay for your graduate studies, or the degree has a near-certain payoff (even professional degrees like JDs and MBAs are losing value as they become more common, however).
When our educational choices respond to the demands of the market, we benefit ourselves and society as a whole. If fewer people get degrees in social work and education, eventually the market will again demand these crucial professions, bringing higher salaries and better training to those people.
Until then, the best we can do is try tipping the scales in our favor, investing our time and money where it will provide the greatest value for ourselves rather than student loan companies.
Nathan is the CEO of Monte Largo Financial Advisors LLC.