The ROI of college education

by kirangarimella on November 10, 2012

(Don’t show this to your kids!)

The phrase “ROI” assumes a ‘financial’ perspective.

From a life enrichment perspective, the more the education the better (upto one advanced degree).

If you are in it for the money, the ROI’s not so good.

I ran a spreadsheet simulation with the following assumptions:

  • College costs $20,000 per year
  • Assume the parents have $20,000 per year available for college – purely from a financial perspective, should they send their child to college or just invest it in the S&P 500 (for the long term)?
  • Constant employment throughout and savings
  • The long-term return of the S&P 500 is 9.5% per year
  • Average starting salaries are as follows:
    • High school: $39,010
    • Associate’s degree: $50,150
    • Bachelor’s degree: $65,800
    • Master’s degree: $80,960
    • Doctorate: $100,000
  • Savings rate: 10% of salary
  • Salary increase: 5% per year (about keeping up with the long-term inflation rate)
  • Repayment of college debt for those who go to college is not taken into account
  • Opportunity loss of investment return for those who go to college is not taken into account
  • Cost of college beyond 4 year degree is not taken into account

If my calculations are correct, at the beginning of their 66th year, the total ‘equity’ of each is as follows:

  • High School: $9,806,409
  • Associate: $9,271,261
  • Bachelor: $7,312,465
  • Master: $7,380,688
  • Doctorate: $5,510,945 (no wonder Ph.D. stands for ‘Poor Hungry Doctor’)

Never mind where the numbers in the assumption come from.  Do your own research and feel free to tweak the assumptions and see what you get. It is tempting to conclude that more education = less money.

While that may be generally true (the numbers don’t lie), there’s obviously more to life than making money, though that message won’t resonate well with most folks these days.

The calculations above are purely mechanical and assume a ‘steady state.’  They don’t take into account:

  • Those with higher degrees have more opportunities (except, it seems, for Ph.D.s)
  • Those with higher degrees are more upwardly mobile; counter-argument: but they are also locked into a comfortable lifestyle and are less entrepreneurial, while a person with only a high-school diploma can go for broke
  • Those with higher degrees are smarter and will tend to invest more and better; counter-argument: reality is that the more you earn, the more you lose to taxes and the more you spend or overborrow.
  • If “The Millionaire Next Door” is to be believed, the people with the most unpretentious wealth are those with small businesses, not the ‘professionals’ – not even doctors making millions
  • And so on and on…

Education really should be a ‘values’ and ‘life enrichment’ argument, not a purely financial one.


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