We all hear the statistics of how much a person will make over a lifetime if one attends college. For example, some studies suggest that a person with a bachelor’s degree will make $900,000 more in a lifetime than someone with only a high school diploma. Parents are also willing to fork over huge amounts of money, and students are willing to go hundreds of thousands of dollars into debt, to obtain a college degree. (Many are not willing to pay off that debt, but that is another story.)
The question I ask today is, “Is college really worth the cost, on a financial basis alone?” The answer is, no.
But wait! Isn’t college how you become wealthy? After all, you make so much more over a working lifetime through a college degree, right?
Well, just looking at the statistics, it is true that a person with a BS or a BA will make about a million more in salary over a working lifetime than someone without a college degree. But that only takes salary into account.
Most people who become very wealthy (have multiple millions of dollars) do so through starting a business. The reason is that starting a business allows them to multiply the amount they can earn by a relatively infinite amount. A person working for someone else, even at a great paying job, is limited to making maybe $50 per hour. Maybe a few people may make $100 an hour. Even a CEO who makes $2M per year only makes about $700 per hour.
A person who starts a business, however, has the ability to make much more. At first the pay may be very low (or non-existent). If she is able to grow the business, however, she can have any number of people working for her, with her getting a portion of the value they produce. She can open 50 coffee shops, or 100 coffee shops, or a thousand coffee shops. With each new store her income grows.
A person who creates something of value that can be duplicated can also experience this multiplier effect. A person who writes a great book, requiring 1000 hours of work, can get paid $10,000 per hour if he sells 10 million books and is paid $1 per book. The same holds for someone who sings a song or create software. He can get paid thousands of times for a finite amount of effort.
But what about people who don’t start a business or sing a hit song? Won’t they be better off financially by going to college? Again, no.
If the parents of those children were to simply invest the amount that was to be spent on college and the children simply took even a simple, low paying job, they would end up much better off. For example:
4-year College Tuition + room and board
(state school) = $80,000
(Ivy League) = $200,000
Invested in long-term mutual funds, assuming a 12% return, the funds would be worth:
Age State School Ivy League
18 $80,000 $200,000
24 $160,000 $400,000
30 $320,000 $800,000
36 $640,000 $1.6 M
42 $1.28 M $3.2 M
48 $2.6 M $6.4 M
54 $5.2 M $12.8 M
60 $10.4 M $ 25 M
66 $21 M $50 M
72 $42 M $100 M
So, in order to make $900,000 more over a working lifetime, one gives up about $21 M if one goes to a state school or about $50 M if one goes to an Ivy League school. Heck, one would be a millionaire by about age 40 even just by avoiding state school tuition.
The point of this is not that people should not go to college. The point is that financially it would be much better to simply invest the money instead of spending it on college and then work whatever jobs were available to pay for necessities, allowing the money in your accounts to grow.
The reason to go to college is to be able to do jobs that aren’t available without a college degree and maybe just be a little better person. When deciding between a state school and an Ivy League, however, consider the difference in lifetime costs. It would be far better financially to go to the state school and invest the difference (or at least not go into debt to attend Harvard) than it would be to get the fancy degree. You just can’t make enough money in a career to make up for the cost.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
Picture Credits: Colin Brough , downloaded from stock.xchng