College as an Investment

I’ve written before that I think of college mainly as a luxury consumer good and not as an investment. So this article in the Washington Times about a paper from the Brookings Institute caught my attention.

The Brookings Institute wanted to answer the question, if an 18 year old had $102k in cash, would he be better off investing in the stock market, or spending it on going to college?

Brookings calculates the cost of a 4 year degree, right now, including the opportunity cost of lost earnings for four years, to be $102k. First of all, I disagree with their assumption that an 18 year old high school graduate is only capable of earning $11,600. I think that figure is something closer to $20k or $30k with a little effort. They take their number from “average earnings” meaning there are a whole lot of 18 years-olds earning zero dollars per year bringing the average down. But let’s take their super conservative assumption anyway.

Brookings then calculates that a 4 year degree is worth about $570k of increased lifetime earnings from a person who works from 22 until 65. And they conclude then that the return on investment is 15%, so it’s a good investment compared to the stock market that typically returns around 7% (their numbers).

Now hold on a second.

I can’t believe they would be this foolish, so I assume I’m making some kind of mistake here. But it appears they’re comparing apples to oranges by haphazardly ignoring compounding interest. When you spend the $102k on college, the money is gone four years later. When you buy $102k in stocks, four years later the money is still there, and then some. Plus, at any time you can decide to sell some stocks and go to school instead, try exchanging your degree for some stock certificates and let me know how that turns out.

$102k invested at 7%, compounded annually for 43 years comes to $1.8M or about a 1,700% gain, as opposed to the 460% gain for an investment in a college education over the same 43 year period.

So the stock investor beats the college student, who both start out life at 18 with $102k, by about $1.2M with his investment when he reaches 65.

Plus, with stocks you don’t even have to show up to work 40+ hours a week for 43 years in order to realize your gains.

And these numbers about the higher earnings of college graduates is always a little shaky. Of course someone with the aptitude, talent and drive to finish a four year degree is going to do ok, but what if that same person had skipped the degree and gone into business? You’re lumping the highly capable people into a group that includes all the people who couldn’t go to college even if they wanted to. – People with below average intelligence and drive. Of course that’s going to bring the average earnings of non-college graduates way down. Let’s see a comparison of earnings with people of the same IQ range who went to college against those in their same intelligence class who didn’t. Then we’ll have some numbers that may actually be useful.

Anyway, there goes another desperate attempt to justify the wasteful educational¬†behemoth¬†we’re seemingly stuck with, apparently made simply to scare off any 18 year old who dare question the norm.

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10 Comments

  1. et
    Posted September 13, 2012 at 11:24 am | Permalink

    Student loans are relatively easy to get, but who would give an 18 year old +$100,000 in an unsecured loan?

  2. Posted September 13, 2012 at 11:35 am | Permalink

    A dead uncle?

    18 year-olds with 100k are rare, but not unheard of.

    But you’re right that a more typical scenario involving subsidized loans and loan forgiveness programs complicates things, pushing it in favor of college.

  3. CJ
    Posted September 13, 2012 at 11:38 am | Permalink

    The article is a bit confusing! I think you misinterpreted it: The $570k of increased lifetime earnings are in net present value terms at the start of the period, not the end. Imagine the following: If you take $102k, invest it successfully over 43 years, you get 1.8mn. But that money discounted back 43 years at 5% gives you only $230k.

  4. Posted September 13, 2012 at 12:03 pm | Permalink

    I tried to find some other numbers for lifetime earnings differences. The census pegs the undergrad earners at $1.8M lifetime earnings verses just over $1M for high school grads.

    So I’m not sure what these numbers are really worth.

    These analyses also always seem to conveniently ignore the risk of failure. What are the odds that you could spend $80k in pursuit of a degree, and ultimately never attain it and get little to no economic return on the money verses the odds of spending that on stocks and losing nearly all of it?

  5. lurker
    Posted September 14, 2012 at 7:41 am | Permalink

    IQ does NOT measure DRIVE. Drive is much more likely to succeed that just smarts….unless you are assuming that really smart people understand the importance of drive. cheers.

  6. et
    Posted September 14, 2012 at 3:20 pm | Permalink

    The Illustrated Guide to Criminal Law

    http://thecriminallawyer.tumblr.com/post/13656784545/1-introduction-crime

    Thought you might like this

  7. lurker
    Posted September 15, 2012 at 9:36 am | Permalink

    perhaps college should be looked at as a reward for many years of hard work before it. it is both a reward and an opportunity to mature and grow. of course working a job will get you mature and grown a lot faster…not sure college is what it used to be before the loan sharks took control of it….

  8. Dragline
    Posted September 15, 2012 at 6:30 pm | Permalink

    The 570K is what I would call a meaningless aggregate number that probably is relevant to only a very small group of people. Even if we assume equally capable people (not a very realistic assumption I know), the results will vary widely based on the nature of the degree, the cost and the intrinsic quality/value of the sheepskin obtained.

    In the end, nobody lives “in the aggregate”. But there is a website that tries to do some comparisons between schools. See http://www.payscale.com/college-education-value

    I don’t think its the be-all-end-all, but its pretty good for rough comparisons.

  9. Posted September 16, 2012 at 12:43 pm | Permalink

    You are also cheating a bit here.

    The $1.8M includes compounded interest. The $570k calculation is when the money is spent.

    You can’t compare money being locked in until 65 with money that you can use. It could for instance be used for investing. With compounding…

    I agree with you that university costs are too high. I think a more interesting comparison would be to take the cost of college and start a couple of companies with the time/money instead. I would expect the payoff to greatly outpace the cost of college.

    Cheers,

    Daniel

  10. Posted September 16, 2012 at 2:33 pm | Permalink

    to me this post fits nicely with your other:

    Edwardian Me

    perhaps College is coming full circle. back to being a luxury for the wealthy.

    if it is only a job training program, there are better options.