Updated: 11/7/2010 9:00 AM ET|
Is a college degree worthless?
The higher incomes that college education brings may not make up for the savings it consumes or the debt it adds early in the life of a typical student.
The four-year college degree has come to cost too much and prove too little. It's now a bad deal for the average student, family, employer, professor and taxpayer.
A student who secures a degree is increasingly unlikely to make up its cost, despite higher pay, as I'll show. The employer who requires a degree puts faith in a system whose standards, you'll see, are slipping. Too many professors who are bound to degree teaching can't truly profess; they don't proclaim loudly the things they know but instead whisper them to a chosen few, whom they must then accommodate with inflated grades. Worst of all, bright citizens spend their lives not knowing the things they ought to know, because they've been granted liberal-arts degrees for something far short of a liberal-arts education.
I'm not arguing against higher learning but for it -- and against the degree system that stands in its way. If that offends, read on, then post a comment at the bottom of this page.
Sometimes things we believe for good reason our whole lives turn out one day to no longer be true, because circumstances have changed. In 2007, for example, I argued, to the anger of many, that renting had come to make more financial sense than homeownership. House prices have since fallen drastically, wiping out buyers nationwide.
With college degrees, I don't want to persuade families not to buy. I want to explain the injustice of the system and introduce a better alternative.
College grads start out behind
Consider two childhood friends, Ernie and Bill. Hard workers with helpful families, each saves exactly $16,594 for college. Ernie doesn't get accepted to a school he likes. Instead, he starts work at 18 and invests his college savings in a mutual fund that tracks the broad stock market.
Throughout his life, he makes average yearly pay for a high school graduate with no college, starting at $15,901 after taxes and peaking at $32,538. Each month, he adds to his stock fund 5% of his after-tax income, close to the nation's current savings rate. It returns 8% a year, typical for stock investors.
Bill has a typical college experience. He gets into a public college and after two years transfers to a private one. He spends $49,286 on tuition and required fees, the average for such a track. I'm not counting room and board, since Bill must pay for his keep whether he goes to college or not. Bill gets average-size grants, adjusted for average probabilities of receiving them, and so pays $34,044 for college.
He leaves school with an average-size student loan and a good interest rate: $17,450 at 5%. The $16,594 he has saved for college, you see, is precisely enough to pay what his loans don't cover.
Bill will have higher pay than Ernie his whole life, starting at $23,505 after taxes and peaking at $56,808. Like Ernie, he sets aside 5%. At that rate, it will take him 12 years to pay off his loan. Debt-free at 34, he starts adding to the same index fund as Ernie, making bigger monthly contributions with his higher pay. But when the two reunite at 65 for a retirement party, Ernie will have grown his savings to nearly $1.3 million. Bill will have less than a third of that.
How can that be? College degrees bring higher income, but at today's cost they can't make up the savings they consume and the debt they add early in the life of a typical student. While Ernie was busy earning, Bill got stuck under his bill.
My example is a crude one. I adjust neither wages nor investment returns for inflation, resulting in something of a wash. I don't take out for investment taxes, since it would take Ernie only a few years to move his starting sum into a tax-shielded retirement account, and both savers could add to such accounts thereafter. I assume 2007's income-tax distribution holds despite ensuing changes that shifted it in favor of Ernie's lower income. I'm comparing only savings, not living standards. Bill will presumably be able to afford nicer things than Ernie along the way.
But maybe not: I assume that Bill completes college in four years. More than 40% of students who enter a bachelor's program don't have a degree after six years, according to Ohio University economics professor Richard Vedder, whose book "Going Broke by Degree" sounded an alarm over college costs in 2004.
VIDEO ON MSN MONEY
There's a big difference between being "educated" and "learning". I know many students who read material for classes - they read just enough of it while taking an online quiz to answer the multiple choice questions, or just enough to write a paper that makes it sound like like they did more research than they actually did. I currently have 2 full time students in my house, and many of the materials that have been "glossed over" for their classes, I have ended up reading in their entirety - just out of interest. When I try to engage in conversation with the student about the material, I get reactions like, "I don't know, I just needed to get the assignment done.", or "Why are you actually reading that?! You're not taking the class!" The ironic thing is, they will (hopefully) end up with a piece of paper that "says" they learned certain things (which they may not be able to actually converse about due to not "really" learning the material-they remembered it just long enough to pass the class), and people like me, who actually take the time to read and learn the material, but are not "paying for the paper" - will be "assumed" to not have learned said material.
1) Based on the salary ranges stated in the article, at age 23, when Bill graduates and Ernie has been working for 5 years, Bill will be making $23,505 and Ernie will be making $17,671. (I got this number by subtracting the max salary from the starting salary, then dividing that number by the total years worked. I then added that amount to the starting salary, cumulative for each year they work, assuming both retire at 65.) For Bill to pay off his student loan in 10 years, he'd have to pay $2,200 a year. Bill is making $5,834 more per year than Ernie, so he can pay the loan and still have $3,634 left on top of what Ernie makes. If Ernie invests 5% ($880), Bill can match that investment and still have $2756 over and above what Ernie makes to invest, pay off his loan faster, or use for a better standard of living.
2) Ernie's total lifetime earnings advantage is based on his retirement investment from age 18. If they both have $16,594 upon graduating from HS (which is a HUGE assumption, since the average American under age 35 has about $6,500 in retirement savings), then why wouldn't Bill invest his savings in a mutual fund returning 8% as well, and then finance the entire cost of his college tuition at 5%. Even allowing for that, he could pay off the entire loan in 10 years after graduating by paying $4,380 a year, invest the same amount as Ernie ($880), and still make $574 more in his first year out of college than Ernie is making in his 5th year in the work force.
I'm not saying that college HAS to go to college, and I'm not saying you can't have a happy life if you don't go to college. I'm just pointing out that this author wrote an article to make a point, and made some pretty key assumptions that manipulated the data to support his point, rather than looking at it dispassionately.
To some people, believe it or not, life is about knowledge and experience rather than making the most money.
As someone who has a Bachelors Degree I somewhat agree and disagree with this article. I currently live in Michigan which has suffered terribly in the economic turbulence. I actually lost my job in January but was able to find work within 8 weeks making more money than I had been before. I feel that my "worthless degree" did help me find a new position with a very good company, but I also feel that my prior work experience also helped back that up.
We live in a world where everyone suddenly feels entitled to everything just because they have a degree (or not). Having a degree does NOT change the fact that if you want to get somewhere in life, you have to work hard. I believe you get out of college what you put into it--you can skate by and achieve the lowest possible grades to achieve graduation or you can hold yourself to a higher standard. Everyone is blaming the educational systems--that's the problem with this country is that everyone blames something or someone because they feel entitled to have X, Y or Z because "They went to college and have a piece of paper." It seems that no one wants to work for anything anymore. I know people who have degrees and have a terrible work ethic and are lazy--why should they earn more? I attended a small Liberal Arts College in New England that had very high expectations of every student. If you didn't live up to those expectations they asked you to leave. They held you accountable for your attendance as well as keeping up with the reading and the assignments. There was no such thing as a "blow off" course and grade inflation did not exist. I have been shocked to learn that some of my friends studied "boating" in college.. WHAT? I was required to pass a comprehensive exam in my field of study as well as write and defend a Thesis. They prepared me for the real world by not giving me an easy ride to that very expensive piece of paper that hangs on the wall. They taught me many of the things that employers look for: Time management, written and verbal communication skills, accountability, collaboration, etc.
I do think that people without a degree can be just as successful, however. I know many people without a degree that make more money than I do. These people also work their tails off. The reality is.. you get out of life what you put into it. Sadly, I think Jack is naive to think that someone graduating high school is going to even think to start "investing" their money. What money they do have will most likely go towards paying bills--rent, car payments, insurance, food, etc.
We in this country are neglecting the apprenticeship system that has worked so well in the past and have instead placed all of our education needs in the hands of colleges and universities. Even if the apprenticeship is not a formal one think of all the people you know who have made it in life without colleges.
The lineman fixing your poles in an ice storm likely did not get his training from a university, same goes with the electrician, plumber, auto mechanic, carpenter, operating engineer, and so on.
Our employers place too much emphasis on a degree when a degree in most cases isn't required to do the job. The degree becomes a defacto hiring tool.
What we need to do is invest resources into the apprentice systems for certain jobs
Amen! If I had only had the guts to follow my desire at 18 to start my own business instead of waiting until I was 35 (and without a Bachelor's degree). Nonetheless, I own TWO successful businesses that I started from scratch (one in Colorado that I run from May-October and one in Florida that operates seasonally from October-May). At 42, I own homes in CO & FL (both with positive equity), stocks, physical gold, silver, currency and rare coins as well as property in northern CA with an eye on buying a home in Ecuador or Brazil within the next 5 years.
This is not to brag. It is to say that I came from a family of 7 children where we got free lunches and lived on a shoestring to being more successful than many of my friends who (although may make about the same or a little more than me) struggle everyday and have the sword of Damacles (or better yet their employer) hanging over their heads every day.
Because of their degrees they felt as though they were entitled to make more. Not through perseverence, knowledge nor ability but from the mere fact they sat in a classroom like sheep and took what others told them as being "true" or "right" do they feel they deserve more.
I have had many discussions with one friend who has a degree in economics and put him to shame repeatedly. Whether the discussions were on America's growing debt (I wrote a paper for a community college course in 1999 sounding the alarms!), the Chinese buying it (he said in the 90s that they will always need it, I told him that those days will end - which they soon will), the housing crash (which I saw coming in 2006 - who the hell gives you a loan for 125% OF THE VALUE OF YOUR HOME???) or the eventual implosion and downfall of America (just another empire in decline) I know what I know because of my consumption of knowledge -- almost NONE of which was ever learned from a textbook and, perhaps, because of a certain level of cynicism.
I would urge every person contemplating whether to go to college or strike out on their own to become an entrepreneur. It is not all "peaches and cream" but, at your young age, YOU CAN RECOVER IF ALL ELSE FAILS. There comes a point in your life when your chance and employment independence comes to an end.
Don't become just another cog in the wheel!
More often than not, hands on experience is more important, but when so many employers won't even consider you for a position when you don't have a degree, or pay you at a level that makes getting the degree they require financially worthwhile, well, what is a person to do?
Oh and compound interest is nice, but I love how all these articles assume you will magically get consistent 8% returns..I'd like to see that. And what about the times when "Ernie" has to go to the doctor with poor/no health insurance.. or his 1995 cavalier breaks down. All these things can cost a lot of money up front and set a person back on their "ideal" savings plan.
There are so many TV shows about how cool college is (and it is a blast), which makes kids pick for the wrong reasons.
About half of the people I see at my liberal arts school would be better off at a two year college. There's nothing wrong with an associates degree. They are so much less expensive and you can actually get a job when you graduate!
That said, it definitely depends on the degree. I've been cramming as much internships in as I can so I'll be employable, but I have tons of friends who major in English, history, art and don't even bother to get a teaching degree with it.
My mom finally sat me down and said that I wasn't going to go to college just to go to college. The most awakening part of her speech was when she told me how much her loans from grad school were (10 years later).
Having a degree cannot hurt; not having a degree may well.
I attended a college the old fashion way, part time, at night, while working full time during the day. I see very few young people doing this today. They don't have skills after +4 years of college. I'd take it a step further and say public high school is probably a big waste of time. I'd recommend finding an alternative way of developing skills. Maybe a 1 or 2 year certificate, designed for the job market, and without all the general requirements.
I personally know a carpet installer who nets over 90k and has done it through out the recession. I also know a person with an english degree from the University of California, now serving coffee at $10.19 an hour. I think this is a trend that will continue. I'm not discounting educated people with skills. But does a college degree equal skills? In many cases it's a waste of time and money.
Copyright © 2013 Microsoft. All rights reserved.
Quotes are real-time for NASDAQ, NYSE and AMEX. See delay times for other exchanges.
Fundamental company data and historical chart data provided by Thomson Reuters (click for restrictions). Real-time quotes provided by BATS Exchange. Real-time index quotes and delayed quotes supplied by Interactive Data Real-Time Services. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by SIX Financial Information.