A while ago I wrote about how getting a college education, and specifically advanced degrees, can have a negative impact on your net worth.
Thomas J. Stanley found in his book, The Millionaire Next Door, that as a group millionaires valued education, to the point where they wanted their children to have even better educations than they received.
The problem he found was that while getting advanced degrees, many of those children of millionaires developed an affinity for high-spending consumer behavior as well.
They valued the high ticket status symbols that go along with their advanced degrees. So in the end, Stanley found that for many getting an advanced degree led many to a point where they were starting in a large hole because of the spending patterns they learned while in school.
This week I found another interesting article about college education that could run counter to the conventional wisdom that getting a college degree is always going to be a good investment. The post, written by Dr. Al Lee, PhD (also known as Dr. Salary), takes a look at whether or not the return on investment (ROI) for a college degree is as big as it once was, or is as big as people assume. The answer might surprise you.
College: A Good Return On Investment?
For a while, there has been conventional wisdom that college graduates are going to earn quite a bit more than people who only graduated high school. Research over the past decade has estimated that a college degree could mean that over a lifetime you should earn between $900,000-1,600,000 more than someone without a degree. The problem is that now some studies are showing the monetary impact of a degree isn’t as big as some have thought.
From BusinessWeek:
Over the course of a working life, college graduates earn more than high school graduates. Over the past decade, research estimates have pegged that figure at $900,000, $1.2 million, and $1.6 million.
But new research suggests that the monetary value of a college degree may be vastly overblown. According to a study conducted by PayScale for Bloomberg Businessweek, the value of a college degree may be a lot closer to $400,000 over 30 years and varies wildly from school to school. According to the PayScale study, the number of schools that actually make good on the estimates of the earlier research is vanishingly small. There are only 17 schools in the study whose graduates can expect to recoup the cost of their education and out-earn a high school graduate by $1.2 million, including four where they can do so to the tune of $1.6 million. At more than 500 other schools, the return on investment, or ROI, is less—sometimes far less. College, says Al Lee, director of quantitative analysis at PayScale, “is not the million-dollar slam dunk people talk about.”
So conventional wisdom used to say that getting a college degree would mean that you would out-earn high school graduates to the tune of seven figures. The reality is that only a few select schools can trumpet an ROI that means earning $1.2 million more than high school graduates over a lifetime. What’s the reason for the big disparity in past studies, and this one? The methodology of how those numbers were arrived at.
The new research is based on self-reported compensation data collected through PayScale’s online pay comparison tools. PayScale examined pay reports from 1.4 million graduates of U.S. colleges and universities with no advanced degrees to calculate the ROI of each school. One reason the PayScale study resulted in a far lower estimate of the ROI on a college education is the way it calculated college costs. Instead of assuming everyone graduates in four years, as some do, PayScale used the actual number of years it takes students to graduate from each institution—4, 5, or 6 years. Another reason for PayScale’s far lower ROI estimate is that it accounts for the fact that many students never graduate—and go on to earn little more than a high school graduate. For them, the ROI on their college education is effectively zero.
Of the two, graduation rates had a far bigger impact on ROI. Of the 554 schools in the study, the net ROI—for graduates only—was $627,239. But once adjusted for the average six-year graduation rate of 58 percent, the average overall net ROI shrank by 37 percent, to $393,574. Schools with the worst graduation rates—at some schools, fewer than 20 percent of students graduated in six years— fared even worse in the PayScale analysis.
So when you look at the data, depending on who you include, the overall net ROI for a college degree was anywhere from just under 400k to just over 600k. That is much less than the estimated $900k-1.6 million.
An Undergraduate Degree: Not What It Used To Be?
One thing that researchers noted was that a college degree isn’t what it once was.
One big conclusion that can be drawn from the PayScale data is that college—and college alone—may not be the great investment it was once thought to be. Richard Vedder, director of the Center for College Affordability & Productivity in Washington, D.C., notes that with the college-educated accounting for a larger percentage of Americans, the bachelor’s degree has been devalued, and its ROI has taken a hit. “We have credential inflation in America. A college degree has become mundane and ordinary,” Vedder said. “We used to send kids to college to become lawyers and doctors. Now we send them to college to work at Walmart.”
Everyone nowadays seems to have a degree, and unless your degree also carries a brand name along with it (Harvard, Yale, etc), it may not have as much value as you might think. In fact, for many Lee suggests that they expect to have – if not riches, at least a comfortable life.
According to PayScale’s Lee, if they’re enrolled at many of the schools on the list, they will be bitterly disappointed. Over the past 30 years, the S&P 500 Index averaged about 11 percent a year. Only 88 schools out of the 554 in the study had a better return than the S&P. Everywhere else, students would have been better off—financially, at least—if they invested the money they spent on their college educations and never set foot in a classroom.
“For almost every school on the list,” writes Lee in an e-mail, “prospective students paying full price would probably have been better off investing in the stock market 30 years ago rather than spending their money on a college education.”
Not only does an undergraduate degree not show an amazing ROI, but the Department of Education found that undergraduates are graduating with less than stellar understanding of the basics. The Department of Education:
“found “disturbing signs” that degree earners “have not actually mastered the reading, writing and thinking skills we expect of college graduates.” Literacy levels among college graduates, the commission noted, fell sharply over the 12 years ending in 2003.
Advanced Degrees Do Carry Better Returns, But Higher Consumption Behavior
One thing that others have proposed, however, is that advanced and professional degrees do carry a higher return on investment than undergraduate degrees do.
Advanced and professional degrees, however, may be a bigger differentiator in the labor market, with bigger payoffs. According to a June 15 study by the Georgetown University Center on Education & the Workforce, the gross lifetime earnings for someone with a professional degree is nearly $4.7 million, about $3.5 million more than a high school dropout earns. “The increased earning power conferred by postsecondary education and training is both tangible and lucrative over a worker’s lifetime,” says Nicole Smith, senior economist with the center.
But as we discussed in a previous post – not only do those with advanced degrees earn more, but they tend to pick up higher consumption and spending patterns to go along with their degrees – so it is a double-edged sword. The key i suppose is to be careful to be conscious about your spending patterns, the reasons why you’re getting an advanced degree, and make sure that you’re going to make good use of it, otherwise your degree may as well be an expensive decoration on your wall.
If you’re getting an undergraduate degree it’s important to get a degree in a major that pays well, and at a school that shows a good return on investment.
What are your thoughts about getting an undergraduate degree. Do you think that the return on investment is as low as this study suggests? Have you found that undergraduate degrees aren’t as highly valued as they once were? Tell us your thoughts on college education, ROI and earning power in the comments!
Sadly, college was never meant to be job-training. A college education is supposed to be about preparing students to become leaders in business, politics, and social organizations. It is supposed to teach students to question what they are told, to be skeptical of the answers, and to ask whether a particular course of action is the best way to achieve a particular objective. They should even ask whether stated objectives should be pursued.
The K-12 system, on the other hand, is supposed to give a uniform foundation–obedient, civic-minded, hard-working, with the same basic knowledge of mathematics, spoken and written English, US and world history, and an introductory acquaintance with arts and sciences–so that factories can quickly train new employees to take their places on the assembly line. It isn’t the fault of the schools that the world changed around them, but they should have re-examined their role in preparing students for employment and citizenship.
It is not at all surprising that the ROI for attending college (as measured financially) is dropping like a rock, since it was never intended for more than a fraction of high school graduates to go on to college, and it was never intended for more than a fraction of bachelor degree earners to go on to obtain more advanced degrees.
One of the effects of the over-selling of the economic benefits of college is relentless price increases for tuition, textbooks, dormitory rent, and even parking passes–everything associated with a traditional college education–up to and beyond the maximum limits of federal financial assistance to college students. Other effects include low-quality “diploma mills” formed to milk students and government agencies of education-related funds and state governments questioning whether they should reduce support for state-owned colleges and universities.
This. This. This.
“The K-12 system, on the other hand, is supposed to give a uniform foundation–obedient, civic-minded, hard-working, with the same basic knowledge of mathematics, spoken and written English, US and world history, and an introductory acquaintance with arts and sciences–so that factories can quickly train new employees to take their places on the assembly line. It isn’t the fault of the schools that the world changed around them, but they should have re-examined their role in preparing students for employment and citizenship.”
College has become a sort of 13th-16th grade, as opposed to a unique learning, questioning, and networking activity. Our public education system is designed to produce uniform factory workers. It does not foster the creativity required for problem solving.
The public schooling system is, at this point, a necessary fallback for parents who have no other options. As for our family, our kids won’t be attending. If and when our kids choose a college path, we will be emphasizing entrepreneurship, self-sufficiency, finding “gaps” in the market that need to be plugged, etc.
I think it all depends on what you DO with your degree. Essentially, just about anyone can get a college degree, but what if they sit on their butt with a degree hanging on a wall, what does it do?
I’ve noticed many people don’t even go into the field they have their degree in. Do you think, in those cases, the job just wants you to have a degree OR do you think many of those people sort of “wasted their money” because it’s not the field they studied in?
Going to college gives you a ton of life experiences, that you won’t get going right into the job force and you can’t necessarily put a price tag on.
The thing is, you almost have to put a price tag on it when considering what you want to do for your college education. Is going to school for the life experiences worth racking up a ton of school loan debt for? Or is your chosen major going to give you a good ROI in any event – besides the life experience? Just another factor that needs to be factored into your decision.
Moving out of your home, living with strangers from different backgrounds, having crazy adventures, learning how to work in groups, manage your own time, budgeting, studying abroad, all worth taking a student loan out for me. Picking a major that will make you happy is better than picking a major that will make you money.
My husband is a chef who has a culinary degree. It cost approximately $36,000. I think he could have gotten the same position he’s got today without a degree, but he does think his schooling was very valuable. I don’t know if it was worth $36,000 though! :)
I graduated with an Ivy League degree 2 years ago. I was a great student and was highly involved in extracurriculars and have never had a problem finding a job that paid well. However, some of my friends who went to state schools found it really hard to find a well paying job out of college. I think more opportunities found their way to me with a “brand name” college degree. That being said I paid dearly for it with $60,000 in student loans. I plan on paying those loans off in the next 5 years as my current job supports that early payoff figure, but if I could have done it again I would have gone to a cheaper school. I think there’s no question that you will find a job easier if you have a degree and will probably make more money than if you just completed high school, but I think a lot rides on how much you paid for your education. If you were lucky enough to have your parents pay or have tons of scholarships, the ROI will certiainly be high for a college degree vs. high school. If you needed to take out student loans to pay for it, your ROI would be less and probably a state school would offer a much better ROI.
I will have to agree with your post, an undergraduate degree has somewhat devalued recently, however, as you mentioned everyone has it now and its not longer a competitive advantage, but an necessity. Regarding the ROI, well that is very relative to each person’s funding for schooling. Many people don’t take advantage of grants, scholarships, work-for-study programs, ect. but opt directly to expensive and high interest loans. Overall college education is a must and it’s definitely worth the money and effort.
This is a great point, but what’s the alternatvie to obtaining a degree?
One should one be doing rather than going to school for four years to boost their income earnng potential…
There may not be a good alternative to a degree, but certainly thinking through the financial implications will be a valuable lesson. Not all colleges are priced the same, or even similarly. A $50,000 education may be just as good as a $200,000 education for producing increased earning power.
Currently, the earnings that I have made during the years (17) after I graduated from the years of schooling that I have undertaken (approximately ten years) may have paid off my education. I probably have made close to $400,000 my entire life. My college cost (not adjusted for inflation, including graduate school) approximately $165,000. This leaves me with approximately $235,000 to cover my other expenses that I am racking up including food, gas, car expenses, internet access, rent, insurance, property taxes, cell phones, entertainment, health related expenses, church tithe, and “other incidentals” such as musical instruments, and a nice camera that I just purchased. So I am breaking even. (As the song goes, “I am barely breathing”!
Incidentally I did not go a “brand named school” (Curry College, Maharishi University of Management, and Antioch New England University).
These must have been private institutions to cost that much? Did you live on campus? What year did you graduate? I went to a private college and commuted back in 1997-2001. Total college tuition+books was about $65K. My graduate degree was an extra $15k from the same institution, but I was able to get my employer to pay for it. I enjoyed the college experience, but my parents were footing the bill. If I had had to take loans or work to pay for it myself, our local public institution would have been more than adequate and would have cost half.
Advancements in technology have completely changed how people receive and consume information. Years ago going to college was a must to get the career you wanted. Now, much of the same information that could only be found/learned in college classrooms can be done through research online. This gives young people a tremendous advantage in pursuing a passion without necessarily getting the degree. I still think college is a great path to take but the degree, the cost and the future earnings potential all have to be considered more now than ever before.
I think in this situation, it’s less helpful to look at what data from the past few decades. The labor markets of 2015-2030 will not be the same as 2000-2015 and certainly not 1985-2030. I think Tyler Cowen’s “Average is Over” does this best job of illustrating that.
Looking at more immediate numbers – employment rates for college grads and those with no college. Millennial college grads have a 3.8% unemployment rate vs 12.2% for those with just a high school diploma. They also make $17,500 more annually, on average. http://www.pewsocialtrends.org/2014/02/11/the-rising-cost-of-not-going-to-college/
Everyone’s situation is unique, but looking at averages, I’d rather find a scholarship or affordable college (even community college) rather than have 4x the unemployment rate and $17,500 less per year.
Great point.