the economics of higher education
By Lotta Debt
Tiny URL for this article: http://wp.me/pOhuI-5k
Editors note: There are aspects of a college education to consider beyond pure economics. For example, a career path offered to a college graduate could be more interesting, stimulating or rewarding than a job which doesn’t require a college degree. Things learned in college could provide useful guidance outside of the career. This article makes certain assumptions. The point of the article is not the assumptions, the point is to attempt a general methodology of evaluating the economic value of a college degree today versus the cost. As the cost of higher education rises ever higher relative to income, clearly there is some limit on cost versus expected earnings that would relegate a college degree to be a poor economic decision. Have we already reached that point? If we have, or when we do, what does that argue for the future of our country?
Americans today are generally aware of the high and ever accelerating cost of a college degree relative to current income. What Americans may not be aware of just how high the cost is.
Lets look at the economics of college.
Massachusetts Institute of Technology
Undergraduate student costs for the academic year 2009–2010 at MIT will be about $52,000.
So the total cost of a 4 year undergraduate degree is approximately $208,000. The total cost of an advanced degree would be $260,000.
Now lets assume you have either have the $260,000 for an advanced degree at MIT, or you borrow the money paying 7% interest. Let’s also assume a 45 year working career upon graduation.
The future value of $260,000 invested (or borrowed) at 7% interest 45 years hence is $5,460,637. Broken down into equal amounts over 45 years, that is $121,347 per year.
So, using these assumptions (feel free to use your own), the college graduate has to make $121,347 per year, every year of his career after college, to just to pay for the education.
Lets say the non MIT counterpart opted instead of college for a trade job. Lets pick an Auto Mechanic.
Auto Mechanic Salary & Pay Scale
Looking through this data, we will assume a modest average annual salary of $40,000 a year for an Auto Mechanic.
Let us note that the MIT Graduate will have to make an average annual salary after graduation of $161,347 to equal the salary of his counterpart, the Auto Mechanic. We will ignore for the purpose of this exercise that the Auto Mechanic started his career 5 years earlier.
So using these assumptions, from an economic perspective, is it a reasonable expectation to earn $161,347 or more upon graduation?
Looking further into the economics of higher learning, today there is data showing as many as one in six college graduates are living at home upon graduation, and unable to find a job. Lets call that 17%. Turning that around, that is an 83% success rate. In considering the economics of a degree, the possibility of not obtaining a job in the chosen career field must be considered.
If your required break even return upon graduation to pay for the costs of college is $121,347, and further if you consider the unemployment possibility, that collectively increases the break even salary requirement to $121,347/.83 or $146,201. So using these assumptions, the collective earnings among all graduates has to be on the order of $150k per year, every year in order to pay for their education.
Note: Footnotes will be added dynamically to this article so please check back if you are interested in the subject.
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