Broker Check

Is College Worth the Cost?

| August 19, 2014
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Higher education has been getting a lot of press lately – and not all of it is good. Headlines have touted higher costs, cuts to funding, rising student loan debt, the unemployment rate of graduates, and other issues. The information has sparked debate about the merits of higher education, and some pundits have suggested young people should choose alternatives to college such as starting businesses, traveling the world, creating art, or engaging in other endeavors.[1] The only way to determine whether college is worth the cost is to evaluate the benefits, the costs, and the alternatives..

The benefits of higher education
For decades, Americans have thought of college degrees as tickets to higher standards of living, and they weren’t wrong. A myriad of studies have shown college graduates with bachelor’s degrees have far greater earning power than high school graduates. College grads take home at least 60 percent more on average – a difference of about $21,300 a year in 2012 – and the earnings gap gets even wider when advanced degrees are earned.[2]

Higher education has indirect benefits, too. Americans with college degrees are more likely to be engaged citizens, be employed full-time, and have retirement benefits and health insurance available to them.[2] Earlier this year, a Pew Research report emphasized the importance of higher education:[3]

“For those who question the value of college in this era of soaring student debt and high unemployment, the attitudes and experiences of today’s young adults – members of the so-called Millennial generation – provide a compelling answer. On virtually every measure of economic well-being and career attainment – from personal earnings to job satisfaction to the share employed full-time – young college graduates are outperforming their peers with less education.”

CollegeBoard, a non-profit organization that was created to expand access to higher education, emphasizes education also benefits society as a whole with “greater productivity, higher tax revenues, lowered reliance on social support programs, and perhaps most important, a more informed and involved citizenry.”[4]

The cost of higher education
Clearly, college offers some attractive benefits, but at what cost? During the past 20 years, expenses related to higher education have increased significantly. Tuition has risen far faster than the rate of inflation[5] and it’s not the biggest expense at many schools. During the 2013-14 school year, the average cost of tuition, room, board, and fees at four-year public, in-state universities was more than $18,000 a year or about $72,000 for four years. At four-year private, non-profit universities, the average cost was almost $41,000 per year or about $164,000 over four years.[6] That’s a hefty chunk of change, and it has left some parents and students wondering whether the money was well spent.

As tuition has increased, so have the loans owed by students. In 1989, just 14 percent of households with members between the ages of 20 and 40 had education debt. By 2010, 36 percent had education debt, and the median amount of debt had more than doubled from about $3,500 to about $8,500, in inflation–adjusted terms.[7] In 2011, the total amount of student debt in the United States was more than $1 trillion which led to speculation about the hazards of student debt and its potential affect on the U.S. economy.[8]

Concerns about student debt have been diverse and plentiful. Some individuals and organizations are worried a student debt crisis featuring massive defaults could necessitate a taxpayer bailout.[8] Others have suggested the student loan debt is negatively affecting the U.S. economy in other ways. For instance, there is some evidence student loans negatively affect:

• Small business formation. The Federal Reserve Bank of Philadelphia found rising student loan debt is correlated with fewer small businesses being established.[9]
• Career choices. Students who graduate with debt tend to choose high-salary positions. When students are unconstrained by debt, they tend to choose lower-paying positions in public service industries.[10]
• Purchasing power. From 2008 through 2012, individuals with student loan debt took on far less additional debt (for homes, automobiles, and other goods) than did consumers in general.[11]

Clearly, the costs associated with college are significant. Taking on debt to finance college may influence students’ life choices as well as the performance of the American economy.

The alternatives to traditional college education
Although it seems clear college, even at current prices, opens doors to career and personal opportunities that might not otherwise be available to young people, perceptions of higher education are changing and alternatives to traditional college are emerging:

• Thiel Fellowship. Peter Thiel, co-founder of PayPal, established the fellowship to encourage young people to “decide what knowledge and skills you want to have, and to think clearly about the best way to acquire them.” The fellowship offers a no-strings-attached grant of $100,000 to individuals who skip college and focus on their work, their research, and their self-education.[12]
• Massive Open Online Courses (MOOCs). Some of the world’s best colleges and universities, along with organizations like The World Bank, Museum of Modern Art (MoMA), and National Geographic are offering MOOCs and interactive online classes. The offerings are available to anyone with Internet access, anywhere in the world, and they often are free.[13]
• Pursue Other Interests. James Altucher, a venture capitalist, Cornell graduate, and father, recommends not sending children to college. He suggests young people start businesses, travel the world, create art, write books, work for charities, or master a game or sport.[14] He also has suggested parents invest the money that would otherwise be spent on college.[15]

Is college worth it?
College is not for everyone. The Urban Institute’s 2014 study, Higher Education Earnings Premium: Value, Variation, and Trends,[2] concluded, “A four-year degree is not a guarantee of immediate and well-paid employment. Especially for students graduating into a weak labor market, it frequently takes time to find the path that will make it clear that going to college was worth it.” However, alternative paths can be risky. A 2013 study from Spear’s magazine and WealthInsight, a consultancy group, found 98 percent of the world’s millionaires went to college and just over 1 percent did not attend a university or dropped out.[16] When it comes down to it, only you and your children can decide whether college is the right choice.

[1] http://www.jamesaltucher.com/2011/01/8-alternatives-to-college/
[2] http://www.urban.org/UploadedPDF/413033-Higher-Education-Earnings-Premium-Value-Variation-and-Trends.pdf
[3] http://www.pewsocialtrends.org/2014/02/11/the-rising-cost-of-not-going-to-college/
[4] http://trends.collegeboard.org/sites/default/files/education-pays-2013-how-college-shapes-lives-report.pdf (Page 13)
[5]
http://www.economist.com/news/united-states/21600131-too-many-degrees-are-waste-money-return-higher-education-would-be-much-better
[6] https://trends.collegeboard.org/college-pricing/figures-tables/average-published-undergraduate-charges-sector-2013-14
[7] http://www.nytimes.com/2014/06/24/upshot/the-reality-of-student-debt-is-different-from-the-cliches.html
[8] http://www.brookings.edu/~/media/research/files/reports/2014/06/24%20student%20loan%20crisis%20akers%20chingos/is%20a%20student%20loan%20crisis%20on%20the%20horizon.pdf
[9] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2417676
[10] http://ideas.repec.org/a/eee/pubeco/v95y2011i1-2p149-163.html
[11] http://libertystreeteconomics.newyorkfed.org/2013/04/young-student-loan-borrowers-retreat-from-housing-and-auto-markets.html#.U87W5hZN1Zg
[12] http://www.thielfellowship.org/become-a-fellow/about-the-program/
[13] https://www.edx.org/schools-partners
[14] http://www.jamesaltucher.com/2011/01/8-alternatives-to-college/
[15] http://www.jamesaltucher.com/2010/02/dont-send-your-kids-to-college/
[16] http://www.spearswms.com/spears-intelligence/lists/smarter-money-how-the-wealthy-have-been-educated#.U9qgybmYbiZ
The above material was prepared by Peak Advisor Alliance.

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