Choosing a College Planning for College

Another Look at the Worth of a College Degree

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An April 5, 2014, article from The Economist reviewed some interesting research. The Pew Research Center looked at 25 to 32 year-olds and found those who had graduated from college and were working full time earned about $17,500 more annually than those of the same age who only graduated from high school. But the large costs of a college education can negate those earning gains, even more so when a college graduate’s degree does not allow him to find a higher paying job. It could be true, as President Obama has said, that learning a trade may allow a student to earn more than if she got an art history degree.

It is most likely unfair to focus on an art degree, but it is practical to look at which college degrees pay off. This can all be calculated by taking the cost of a degree (minus scholarships and grant monies) and looking at pay scale estimates for graduates over a 20 year period. This equals the annual return rate of a college degree or whether or not the cost of a college degree is worth it over 20 years of work.

For example, a Harvard degree yields a 15.1% annual return rate versus a degree from the University of North Carolina at Asheville which only yields a -.03% rate of return annually. Big Difference! So how can a college applicant decide whether or not to pay for a college degree and where to go for the best return on a college degree’s cost?

First, what you choose to earn your degree in can make a difference. An engineering degree is always a good investment. An engineering degree from the University of California at Berkley can mean a graduate can be $1.1 m better off in a 20 year period than someone without a college degree. Even an engineering degree from a lesser known public university means a $500,000 boost in earnings over twenty years over that of a person with no degree. Arts and humanity degrees offer varying investment returns. A liberal arts degree from more prestigious schools like Columbia pays off, but the same degree from a  school that is less selective may actually cost a graduate money. For example, you could earn less than a person who never got a college degree after paying off the debt accumulated in earning your college degree, even over a 20 year period. In Fact, 46 liberal arts degrees’ return rate of investment is less than putting monies into a 20-year treasury bill.

There are other factors to consider. Some colleges may look like a poor investment because of unfair assessments. Local job markets that are in a slump may skew the value of a degree from an institution, but graduates who move away from that location may do very well. Some college degrees seem to have healthy returns on their degrees, but that may be because they are endowed enough to offer higher financial aid packages which bring down their costs. However, their degrees may not be worth what other institutions offer. A poorer university that can’t afford to offer large and generous financial aid packages and who serve the more general public, admitting students who do not have access to selective schools, will look like a poor investment when the degrees they offer may actually be very valuable helping students succeed better than they might have done. On yet another note, there are no studies of what a college graduate could earn without their degree, and comparing the earnings of a college graduate against those without degrees may again be unfair because those who did not earn a college degree may be less capable in general.

Even as hard as it is to decide the value of a college degree, what college major offers the most earning potential and what college offers the best return on the investment to earn a degree—whether the tuition costs are high or low—is difficult. Yet, very important! Costs per student have risen at a rate of 5 times as high as costs in 1983. The average college debt in 2012 was $29,400, and 15% to 22% of borrowers default within the first 3 years of starting repayments. College costs go up even more when students end up transferring, dropping out, or taking one or two extra years to graduate. On top of all this, the national job market is flat. 42% of recent college graduates are in jobs that do not require a college degree, and 41% of college grads cannot find a job in their degree field. Many managers add that college graduates do not have the skills and preparation to be in the jobs they have available.

What, then, can college applicants look forward to? There is some light in the distance.

  • There is more and more transparency: More schools, to be competitive, are publishing information that reveals what their graduates earn versus what they owe within five or so years of graduation.
  • Technology is allowing more online colleges and course work: This can greatly reduce the cost of college and offer working students the flexibility to earn a timely degree.
  • Costs of college are expected to come down: With more transparency increasing competition and with technology that offers lower costs for access to course work, colleges will have to adapt.

The college market must adjust to the needs of students and the economy. The more savvy college applicants force colleges to measure up, the better it will be.