is college worth it? (part 1)

guinea pig reading a book

Based on a few recent comments on some of my articles about careers (this one, for example), I started wondering about the difference in wealth between college graduates and skilled non-college graduates. A college graduate can usually expect to go into the professional world as a “white-collar” worker, earning substantially more than his non-college graduate peers. However, the college graduate – unless he is very athletically or academically gifted – will probably come out of college with at least some student loan debt. He will probably start earning money several years (4 or more) later than a non-college graduate.

So I decided to do a comparison of the two career paths, and see what those big choices meant for someone later down the road. Specifically I wondered if I could answer a few questions:

  1. Can the late start in saving by the college graduate be overcome through higher salaries?
  2. Does the lower earning potential of a non-college graduate mean that the non-college graduate will be required to “work until they die”?
  3. Who will be able to quit the rat race first?

I made a lot of assumptions and put together a spreadsheet to try to come up with answers to some of these questions. I’ll cover that in part 2. I ignored a few things – I didn’t worry about inflation, for example, since it would affect them both equally. You could argue this is wrong, because inflation moves at different rates in different parts of the country, commuting costs (gas, etc.) might expose one or the other to more inflationary pressures, etc. I skipped that. I also assume that both are highly disciplined savers, always saving 10% of their income and getting decent returns over time. If, of course, both started saving as soon as they start earning and never reduce that amount, they would be in the .000001% of the US population that does so.

My findings were a surprise and weren’t a surprise to me. The main point of the exercise was for me to challenge my own personal context (a concept Robert Kiyosaki talks about a LOT in his book “Retire Young, Retire Rich“). My context is that smart people go to college and get desk jobs. My context is that wealth is created through earning as much as possible. I am trying to challenge my own prejudices about what “building wealth” and “escaping the rat race” actually mean to me. It’s interesting, because I don’t have much exposure to people who don’t subscribe to the “go to college, earn money” credo; but fortunately I’m learning more about the opposite mindset and it’s interesting for me. It’s too late for me to undo my decision to go to college for 7+ years. There were alternatives – I could’ve started a business and educated myself. It’s not too late for me to learn something new.

Stay tuned!

(photo by GirlReporter)

  • Danny Tsang

    This is going to be VERY interesting. It’s amazing, I was just discussing this with my sister and my mom. My sister is going to college next year and I am graduating in a few days. I was joking with my mom and I actually told her that had I started working and/or focused full time on my businesses when I first got out of high school I would have gotten a head start investing a portion of my income. Additionally, I told her I would have invested the cost of college and I would likely end up with more money in the end. She told me that even if that is true, I’ll have to live life knowing that I never finished college. I asked her well isn’t the point of going to college to make more money when you get out? She just kinda looked silent and told me to stop putting bad ideas in my sister’s head lol. My sister even responded by jokingly saying mom I’m going to just keep working my way up and not go to college.

    All kidding aside, being a fresh college grad (almost, few days away), I did enjoy the college experience overall. However, I honestly and truly do not know if I have learned much in my classes themselves. I’m more of a self learner from books, websites, life experiences, people etc and I felt that I learned much more during my college years outside of actual classes. Classes actually got in the way at times from me running my businesses correctly and forced me to sell a very successful business in my freshman year. Also, I honestly don’t know how my college education would benefit me in the future. Perhaps I just don’t know it yet because I never went searching for a job, but it just seems as though my college years(5 of them) came with very high opportunity cost as well as crazy tuition and books. I guess I’ll have to wait and see if college was worth it. At this very point in my life I don’t think it was worth it financially at all. Not even close…

  • http://www.thefinancialblogger.com The Financial Blogger

    I think it all depends on what you want to do in life. If you want to have a desk job, then college is the perfect place to be! If you want to start your own business, get some accounting, taxes, economic night classes and get going with your project right away. In my opinion, grades are more likely meaningless:
    http://www.thefinancialblogger.com/mba-grades-are-meaningless/

    Going to college and doing further study will get you paper but it is what you learn from those papers that really matters!

  • http://insignificantmoments.blogspot.com/ Insignificant Moments

    I think it depends on your major and what direction you end up heading. If you come out with a history degree owing $10,000 and making only $25,000 that might not be a good investment. You might have been better off going to a 2 year trade school. But if you come out owing $10,000 with an engineering degree making $40,000, that might not be so bad. But within 3 years of working and passing your license exam, you could be making $77,000 (CA) with that same engineering degree. Whereas, you might still be making only$30,000 within 3 years with that history degree.

    It all depends on what you studying and how realistic you are in planning your future. Of course, when you are 18 and moving out on your own for the first time, it is really hard to see the economic impact of your decision in college. I try telling my freshman sister to rule out the “soft” majors because I know that even if she gets a “B+” or “A-” GPA with a psychology degree, she would have a hard time getting a job that would pay her $30,000 a year. She would need at least a master’s degree and then she would come out owing even more money.

    I always knew that the whole point of going to college was to be able to earn more money when you get out. My family does not have enough money for me to go to college just for personal enrichment. But some how that message got lost with my sister. The message she is hearing is that she needs to go to college because her big sister is a college grad.

  • http://www.guinness416.com guinness416

    I’ve noticed a trend in the moneyblogging world to idealize self-employment and skipping college, which I’m extremely skeptical of because it mostly seems to be by people with degrees. Mind you, that’s easy for me to say because I had free education in Ireland. So I’ll be interested in your findings.

    And I agree completely with Insignificant Moments above, we can discuss this til the cows come home, but even the savviest 17 year old will find it difficult if not impossible to do the cost benefit analyses of college vs work, even if we’re just talking about analyzing cold hard cash.

  • t h rive

    …i’m interested to see what lines and generalizations you stick to to make your analysis. Don’t get me wrong, the generalizations are necessary, they’re just going to be strikingly obvious to anyone who doesn’t agree.

    …would you consider adding more variables? anyhoo, i like how you set out your first 3 questions early.

    Peace!

  • http://fecundity1.blogspot.com/2007/12/link-roundup-or-what-to-do-when-writers.html Fecundity – Link Roundup

    [...]Brip Blap has apparently done some calculating to figure out if college is worth it financially. He’s only posted a teaser [...]

  • http://www.moneysmartsblog.com/ FourPillars

    I think that post-secondary education is generally worthwhile if you don’t spend too much money on the education and especially if you don’t have anything better to do.

    For example there seems to be a big disparity in the cost of different institutions which should be factored in the decision of where to go to school.

    Also, if you are keen to start up a business or like Danny mentioned “running a very succesful business” then you should take that into consideration as well. Why would you sell a successful business to go to school unless you thought for sure that school was a better option?

  • http://www.moneysmartsblog.com/ FourPillars

    Just to add something to what Guinness said – I think a lot of people are using 20/20 hindsight when they say they should have skipped college. Of course if you pick the right business/webpage to start up (instead of college) then you don’t need college but how many people can do that?

    I went to university (as we call it up here) because I had the opportunity and because I really didn’t have anything else in mind. It has definitely paid off for me since I don’t think I would be making the same coin if I hadn’t gone. And yes, post-secondary education is all about coin!!

    Mike

  • SavingDiva

    I have to admit that I didn’t have any school loans (and didn’t pay tuition). However, I don’t think I was ready for the real world at 18. I needed to live in the dorms and have my meals prepared for me….

    Plus, I don’t think I would be happy being a plumber…

  • Pingback: Around the PF Blogosphere: December 12, 2007 | The Sun’s Financial Diary | A Personal Finance Blog on Saving and Investing

  • http://www.bripblap.com Steve

    Wow, great comments and I haven’t even put the main part of the post up yet! I liked “insignificant moments” thinking – college has to be viewed as a mechanism to a higher salary to make it worth it. It doesn’t mean you can’t take a few courses just for your own enlightenment on the side, though.

    Guinness416 has a good point, that the “no college” route is idealized by people who did attend college. I come at this from a tiny minority, because I attended college at a profit: I turned down attending some expensive private schools I was accepted to (Harvard being the most well-known of the bunch) in order to attend a state university with massive scholarships that paid for tuition, room, board, fees, and even some extra spending money. I finished college at a profit – so I am prejudiced in favor of attending college if you can get it all paid for like I did – I think Mike (Four Pillars) is making the same general point. I do wish, however, I had wrapped it up quicker than 7 years, though.

    I would hate to say that in Danny’s case – running a business – I’m not sure I would recommend college. I’m sure the world of entrepreneurs contains a fairly even mix of college graduates and dropouts (Bill Gates, etc.) – but if college made you stop a successful business I would say it was not beneficial to you.

    SavingDiva hits one more good point – some people need college as part of their growing up process, and some don’t. I sure wasn’t ready to enter the working world at 18 – I wasn’t mentally prepared at all, and if I had I certainly would have floundered for a few years before finding a direction, I think.

    Again, great comments, and I’ll be interested to see everyone’s take on the second part (coming out Thursday morning).

  • Insignificant Moments

    Saving Diva – that is why college has been referred to as the last playpen. It is a chance for young adults to dip their toes in the water of adulthood within the structured and safe environment of a school.

    I just don’t think there is enough guidance at the high school level to help kids figure out what to do after high school. They only stress getting into a college when a trade school for some kids would have been a much better choice.

  • http://hopetoprosper.com Bret @ Hope to Prosper

    “3. Who will be able to quit the rat race first?”

    According to the book The Millionaire Next Door, someone who is self-employed is four times more likely to become a millionaire in their lifetime than someone who is employed.

    I went to college and have a great career job, but I also have side-hustles. My two brothers also went to college, but they started businesses and significantly out-earn me. But, thoses businesses come with long hours and a lot of headaches. The key for all of us has been that we worked our way through college. So, we started earning before most college students and we didn’t graduate with any student debt.

    My advice to anyone who is headed into college is to take some fundamental business courses, such as Accounting and Business Law, no matter what your major is. That way, you can always take your skill and start a business, if you choose. And, if you take the corporate route, like me, these skills can be very valuable to your employer. I work in IT, but I report to the CFO. Knowing Accounting has helped me on countless projects and established credibility.