Having read Sterling White’s critical look at college, “Is a College Education Financially Worth It — Or Is It a Giant Scam?“ I felt the sudden urge to piggyback on the discussion. As Sterling notes:
“Education is important, no question about that. However, considering our ever-changing world and new technology, there are many learning options. There are options that won’t leave you with a big lump of debt for the rest of your life.”
I think this is a key observation. Personally, I went to college and learned a few things, but I have applied very little of that to my own career in real estate. I had a lot of fun in college and met some good friends, but financially, it’s hard to justify the expense.
Of course, there are reasons to go to college. If you want to go into particular fields, such as medicine or engineering, it’s all but required. So yes, college is good for some people, for sure, but it’s not good for most — and there are other good options available.
College is Often a Bad Financial Idea
The idea that college is financially overrated really hit home for me when I read a thought experiment by financial columnist Jack Hough, which I will quote at length:
“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.”
Compound interest, as they say, is the eighth wonder of the world!
The “College Graduates Make a Million More” Fallacy
This highlights the fallacy behind the whole “college graduates make a million dollars more than non-graduates” claim. The problem is that you are comparing apples to oranges. The United States has gotten obsessed with credentialism, so a disproportionate share of the smartest and hardest working people are going to college.
But in the end, you’re not just comparing, say, an accountant who went to college to a plumber who didn’t. You are also comparing college graduates who enter the workforce to the most impoverished, underprivileged and sometimes incarcerated people in the country, making such a comparison all but meaningless.
And there’s a major difference between degrees, too. CBS News ran an article about the 20 worst-paying college degrees. Coming in dead last was Child and Family Studies, with a starting average salary of $29,500 and a mid-career average of $38,400. Art History was 20th, with a starting average salary of $39,400 and a mid-career average of $57,100.
And, of course, this doesn’t account for the pile of student debt many college students incur. Currently, in the United States, there is a total of $1.4 trillion dollars in outstanding student debt!
And it’s going to get worse before it gets better. As Steve Odland notes for Forbes,
“College costs have been rising roughly at a rate of 7% per year for decades. Since 1985, the overall consumer price index has risen 115% while the college education inflation rate has risen nearly 500%.”
What Does College Get You?
But colleges do provide a great education, right? Well, not always. Here’s how the New York Sun described the results of a test administered by the Intercollegiate Studies Institute:
“Students at many of the country’s most prestigious colleges and universities are graduating with less knowledge of American history, government, and economics than they had as incoming freshmen, with Harvard University seniors scoring a ‘D+’ average on a 60-question multiple-choice exam about civic literacy.
“According to a report released yesterday by the Intercollegiate Studies Institute, the average college senior at the 50 colleges and universities polled did not earn a passing grade.”
And that’s for those who graduate. Graduation rates overall, are not particularly impressive. According to US News:
“Studies have shown that nonselective colleges graduate, on average, 35 percent of their students, while the most competitive schools graduate 88 percent. Harvard’s 97 percent four-year graduation rate might not be that surprising … [but then]Texas Southern University’s rate was 12 percent.”
And despite our obsession with credentialism, as more and more people get credentials, that just leads to “credentials inflation.” Thus, it shouldn’t be shocking that in 2012, 53 percent of recent college graduates were either unemployed or underemployed. It also shouldn’t be surprising that defaults on student loans have started to increase. According to The Chronicle,
“One in every five government loans that entered repayment in 1995 has gone into default. The default rate is higher for loans made to students from two-year colleges, and higher still, reaching 40 percent, for those who attended for-profit institutions …
“The government’s official “cohort-default rate,” which measures the percentage of borrowers who default in the first two years of repayment and is used to penalize colleges with high rates, downplays the long-term cost of defaults, capturing only a sliver of the loans that eventually lapse …”
Alternatives to College
As shown above, professions such as plumbers and electricians can do quite well without a college degree, as well as many other professions. Yes, you’ll have to start lower on the ladder, but you have four more years (or five or six or seven more years) to move up — and a lot less debt to boot.
And then, of course, there’s entrepreneurship. Unfortunately, American entrepreneurship is in a steep decline. In 1975, almost 15 percent of total businesses were less than a year old. In 2010, it was less than half that. Much of this, I believe, has to do with our obsession with college and credentialism.
Despite the just-a-little-bit negative tone of this article, I again need to stress that college is definitely a good idea for some people. (This is especially true since we have a good number of student rentals in our portfolio.) But college is not just “what you do after high school.” Today, in my opinion, too many people are going to college, and many of them are not served and are actually hurt by it.
There are many alternatives to college that people should consider. And entrepreneurship (including our favorite kind, real estate investment) is high on that list.
Weigh in! Do you believe kids should be thinking twice before enrolling in college? Why or why not?
Leave a comment below.