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the economics of higher education

 

By Lotta Debt
2.24.2010
EarthBlog News©

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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
Costs
Undergraduate student costs for the academic year 2009–2010 at MIT will be about $52,000.
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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
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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.

16 Shocking Facts About The Student Loan Debt Bubble And The Great College Education Scam

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About 1 in 6 college graduates earns less than high school graduates
By United States Department of Labor
Earning generally increase with additional educational attainment, but this is not true for every individual. In 1996, about 17 percent of college graduates earned less than the median high school graduate.
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College graduates move back home
As entry level jobs are harder to find and living independently becomes more expensive, recent graduates are moving back home in greater numbers.
By Gerri Willis, CNN personal finance editor
July 23, 2009
(CNNMoney.com) — They’ve been dubbed boomerang kids and a recent poll by collegegrad.comshows that 80% of 2009 college graduates moved back in with their parents. That’s up quite a bit from recent years.
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Back to the Nest
By Deborah Weiss
The most recent census figures show that 56 percent of men and 43 percent of women ages 18 to 24 live with one or both parents, and an estimated 65 percent of recent college graduates have moved back in with their parents.
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Does a College Degree Protect your Career? Unemployment Rate for College Graduates Highest on Record
By Mybudget360
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College graduates struggle to repay student loans
By Christine Dugas, USA TODAY
Thousands of college graduates are facing a student loan crisis. The job market is shrinking, and the sour economy is preventing employers, parents and relatives from helping those who are behind on payments.
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No Job And $50,000 In Student Debt. Now What?
Deb Weinstein
02.23.10
I had a plan to pay off my career-changing graduate school debt. Now all I can do is defer payments. Or win the lottery.
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Major Trends in Employment: College Graduates Now Facing Higher Unemployment, U-6 Rate now at 14.8%, and 4.3 million jobs lost during this Recession.
Mybudget360
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Job market worsens for recent college graduates
Unemployment among young adults is worse than the U.S. average. Little relief is in sight.
By Don Lee
The unemployment rate dropped last month for men and women, blacks and whites, lifting hopes that the long dry spell in the jobs market may be coming to an end. But for recent college graduates and other young adults, the labor situation didn’t just remain dire — it got worse. For 20- to 24-year-olds, the jobless rate rose four-tenths of a percent to 16% in November, even as unemployment nationally slipped to 10% from 10.2%. And data from the Labor Department show that the unemployment figure for college graduates in that age group was 10.6% in the third quarter — the highest since early 1983 and more than double the rate for older college-educated workers.
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Americans growing more skeptical of college motives and costs
By Bill Graves, The Oregonian
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Down and Dirty with Financial Institutions and the Cost of Education
In the heart of every American is the desire to be successful.  A person’s conception of success can vary from person to person.
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University of California campus erupts in riots
03 March, 2010,
Violence breaks out as students at the flagship school of the University of California protest stiff tuition hikes.
Students at the University of California’s flagship Berkeley campus took to the streets on Friday night, vandalizing university buildings, burning trash cans and clashing with police in the latest expression of frustration over cuts to the educational budget in California.
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College Graduates’ Debt Load May Outstrip Ability to Repay
By Janet Lorin
April 26 (Bloomberg) — Students, especially at for-profit universities, are leaving college in the U.S. with a debt load large enough to raise questions about the ability of many to repay loans, a study found.
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  1. John
    February 26, 2010 at 12:29 am

    I agree with your point but feel your math is flawed you can not use compound interest in calculating the non-college investment and then divide it by how many years the career was. The majority of that (7% interest 45 years hence is $5,460,637) was made in the last 10 years of investing and the auto mechanic did not have $121,347 available as income in the first 5 years. Therefore the MIT grad does not have to make $161,000. The real math should be the increase in pay minus cost of loans with the 17% risk of not having the desired career or living back with your parents vs a 4 year head start and less debt risk.

    • February 26, 2010 at 1:07 am

      Thank you for the comment.

      Yes I agree there are problems with the math, and beyond the ones you mention.There are also arguably problems with the assumptions. It was a gross simplification just designed to get people thinking. The main point I’m trying to make is that there is some level of cost vs what a graduate could earn, which makes the decision a poor economic one. You could probably spend quite a bit of time working out all the calculations and arguing the assumptions to come up with an exact number of what a college degree and of what type is worth. I had a request from someone to use “an introspective look” as the basis for a thesis and I was sort of figuring this might make good subject matter for something like that as well.

  2. Dan
    February 26, 2010 at 1:16 am

    “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.”

    That doesn’t make any sense at all. It assumes that the student will not pay off any part of the principal amount or even the compounding interest until 45 years after graduation, and that he will be saving his money for all that time at zero interest, until he finally has made enough money to pay off his student loan.

    In reality, someone who makes $161,347/yr (another questionable assumption) and who can save $121,347 of that (even more doubtful; taxes anyone?), could pay off a $260,000 7% loan in less than 3 years.

    Having said that, the rapidly rising costs of education _will_ become a major problem for students, parents and even society at large, and I would definitely encourage you to come up with more realistic assumptions and calculations, and also to compare present and future costs of higher education with those in the past.

    • February 26, 2010 at 1:42 am

      You are entitled to an opinion. To say it doesn’t make sense is arguing assumptions. If you have $260,000, and you are making a decision whether to use it for a college degree, or invest the money, the assumptions you make regarding rate of return, career length, career choice, salary and salary increases, etc determine whether the decision makes sense economically, or not. Feel free to make your own assumptions…I stated that in the article.

      The larger point, which is an implied point of the article that I should have stated explicitly, is that if college costs are rising relative to income (which they are), at some point in time, the cost will exceed the economic value of the degree. This is also dependent on the specific career. The point which is arguable, is whether or not we have already reached that point and if not, at what point in the future will it be reached. In other words, it’s not an if, it’s a when.

  3. Kevin
    February 26, 2010 at 7:36 am

    Ultimately, I think much or all of the student debt will be defaulted on in one way or another along with virtually all other forms of debt.

  4. Adrian
    February 26, 2010 at 10:05 am

    Two things: Firstly, the graduate could choose to make minimal principal repayments on the loan, essentially opting just to pay the interest. At 7% the grad will need to make an additional $18200 pa to cover those interest payments. I suspect the typical grad with an “advanced degree” will average significantly more than $18200 pa in income by comparison to an earner with only school qualifications. Secondly, as your “when” is approached fewer people will opt for the education – causing a skills shortage, pushing up grad salaries. IN other words it IS an if – and probably never a “when.”

  5. Rob
    March 1, 2010 at 3:08 pm

    Maybe the govt should spend a little less on war and a little more on shcool.

  6. February 25, 2013 at 3:39 am

    Quality content is the main to attract the people to go to see
    the website, that’s what this web page is providing.

  1. February 24, 2010 at 11:14 pm
  2. February 25, 2010 at 3:53 am
  3. February 25, 2010 at 6:06 am
  4. February 27, 2010 at 8:06 am

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