An article in last weekend's newspaper analyzed the payback of a college degree – Does It Pay to Go to College? by Scott Burns, reminded me of the cost-benefit analysis I've been intending to do. I have a college degree in electrical engineering and have benefitted from the boost in earning power. However, I'd like to take a close look at the economic value of a degree in today's world. This is particularly important for homeschoolers as they consider their highschool plans. Many are convinced their kids must attend college and spend a lot of time preparing transcripts and effectively letting the college admissions officer establish their high school curriculum. For some, this may be the path God intends but we need to carefully assess what we are doing and why, particularly as we seek to finish strong in the home stretch of our children's home education. Certainly, a rarely challenged cultural assumption in modern America is that "you must go to college" or be forever lost as a second class citizen trapped in life long poverty. Let's put a pencil to this assumption. References and links are appended below for the figures I will use.

Let's compare the costs and income for two different situations of your typical college age student – Mr. Worker works at an entry level job full time while Mr. Student attends university full time in the fall and spring while working at an entry level job for 3 months in the summer. It's assumed the parent pays room/board in both cases so there's no cost difference since both live at home. Mr. Student attends a major public university as an in-state residence, so the average annual cost for tuition, fees, and books is $7000. Mr. Student's parents have been financially responsible and productive over the years and have a sizeable savings, no debt, and an annual income typical for upper middle class Americans. God has financially blessed their frugality and wisdom and Mr. Student does not qualify for financial aid at the public in-state university.

Mr. Worker is an apprentice in a trade and nets $10 an hour*, 40 hours a week, 50 weeks a year, so averages $20,000 income each year. Mr. Student makes $10 an hour, 40 hours a week, 12 to 13 weeks a year so averages $5,000 income each year.

Mr. Student's parents pay an average $583 each month for 4 years for a total of $28,000 for his 4 years at the university. Mr. Worker's parents contribute $583 month to a typical mutual fund account averaging an 8% annual return (8% is a low estimate of the average long term annual gain for a low risk U.S. mutual fund). At the end of the 4 years, the total value of these monthly payments is 0 for Mr. Student (the college has it all) and $33,000 for Mr. Worker (amount contributed each month plus interest).

Since Mr. Worker is living at home, he saves all his income in a typical mutual fund account averaging an 8% annual return. Saving $1666 a month for 4 years in the account results in a balance of $94,000. Mr. Student saves his 3 months of income each year (which is 1/4 of Mr. Worker's) in an equivalent account with an 8% annual return, which results in a balance of $24,000. Note that in both cases the parents are paying all living expenses and they are assumed to be the same.

So at the end of 4 years, Mr. Student has a college degree and $24,000 in cash, while Mr. Worker has 4 years experience in his trade plus $127,000 in cash (his income plus his parent's contribution). Both students move out of their parents' home and begin their career using what they've learned in 4 years. They keep their cash in the investment accounts earning an average of 8% annually. Mr. Student has $103,000 less money than Mr. Worker. He must earn more than Mr. Worker does in order to catch up and surpass him. How much more and for how long?

The $103,000 growing at 8% annually grows to $229,000 in 10 years. If Mr. Student saves an extra $1,250 each month (in the 8% account), he will reach the $229,000 in 10 years. $1,250 monthly is $15,000 a year, so if Mr. Student's after-tax salary exceeds Mr. Worker's by 15,000 each year then Mr. Student is better off financially. Note that Mr. Student will likely be in the 25% tax bracket, so he must earn $20,000 extra, before taxes, to net the $15,000 to save and invest.

Beyond this, it gets difficult to compare directly since we don't know how fast their respective salaries will grow, the effective tax rates, probability of layoffs, etc. But you can roughly assume that the financial head start Mr. Worker has is equivalent to an extra $20,000 the first year. If Mr. Student's job is with a Wall Street investment bank, or he is drafted as the starting point guard for the Los Angeles Lakers, he will easily make $20,000 more than your typical tradesman or small-business owner. But realistically, he will be hard pressed to exceed Mr. Workers salary by $20,000, especially since Mr. Worker will have 4 years work experience rather than earning a starting salary.

Here are a few representative starting salaries for recent 4-year college graduates:

Accounting $46,039; Engineering $49,715; Educational Services $30,291; Oil & Coal Products $53,611; Aerospace $54,410; Retail Trade $34,932. So even if Mr. Student starts work as an accountant, he will have less overall net worth 10 years after graduation than Mr. Worker would even though Mr. Worker's annual income after 4 years of apprentice work had risen only to $26,000.

Further, we have considered only the least expensive college scenario. If Mr. Student lives out of town, room and board cost must be added. If he attends a private university, average tuition is triple that of a public university. If either of these are the case, Mr. Workers financial head start will likely be insurmountable. For example, average room and board cost alone is about $7000 a year. If Mr. Worker's parents paid that amount to his fund (instead of added spending for room/board), he'd have an additional $33,000 saved. His then $136,000 head start grows to $302,000 in 10 years. Mr. Student needs $1,650 a month extra or $20,000 a year. Also consider if Mr. Student requires 5 years to complete his 4 year degree, which is typical. Mr. Worker is then ahead by another $20,000 plus interest. If Mr. Worker makes more than an entry level wage of $10 an hour, which he should if his apprenticeship trade is in-demand, his advantage is further increased. And what if Mr. Student attends several years and fails to earn his degree? What if Miss Student earns her degree and works 3 or 4 years full time then stays home with children or works part time? In each case, the young adult that worked and saved instead of attending college would have a great financial advantage over the college student.

Further, note that Mr. Worker's savings balance in the 4 year scenario ($127,000) is about the same cost as an average starter home**. He could buy his home free and clear never having any debt. He is then set to save what would have been rent or a monthly mortgage payment into his own investment account, while Mr. Student would need to borrow over $100,000 to buy the same home. At age 22, Mr. Worker has a home free and clear and is already saving for retirement while Mr. Student ponders 30 years of mortgage payments.

In conclusion, college is a good economic value for some but probably not for most. Going to college to learn something you enjoy and gain training to fulfull a calling is a good reason to go. Just blindly planning to go because everyone says you have to, may not be financially wise and may put the young adult at a considerable economic disadvantage compared to other vocational paths. Count the cost and consider your options.

*For further consideration:***…alternatives for getting the degree – distance learning and credit for knowledge already gained**

**…vocational learning and entrepreneurship**

**… investing your savings wisely to build your assets and beat inflation**

Postscripts:

October 12, 2007 HSLDA's regular magazine, "The Home School Court Report" Sept/Oct 2007, has a cover story on apprenticeship.

March 14, 2011 Why Less School Earns Students More Money

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*net income after social security tax and income taxes. At low income, the federal income tax impact is negligible.

**about $19,000 of the $127,000 is investment gain. The net impact of federal income tax on this gain is estimated to be $2000 when the money is withdrawn to buy the house, leaving $125,000 to spend on the home.

References:

Scott Burns Does It Pay to Go to College?

Average college costs

http://apps.collegeboard.com/fincalc/college_cost.jsp

http://www.offtocollege.com

Expected Financial Contribution (what Parents would pay, for estimated financial aid) http://www.collegeanswer.com/paying/est_efc/efc_index.jsp

Savings and investment calculator

http://www.quicken.com/banking_and_credit/savings_calc/

Average starting salaries

http://www.collegejournal.com/salaryinfo/negotiationtips/20061024-loeb.html