The standard advise is that everyone should go to college if they are able, and the better the school the better you will do in life. We hear about how a college grad will earn a million dollars more over their lifetimes. We also hear that an Ivy League school such as Harvard will open doors and result in a bigger salary.
Unfortunately, the price of a college education has risen so fast in the last two decades that it is now questionable whether it is actually worth the money. The cost of Ivy League schools in particular have risen dramatically to the point where graduates are leaving with student loans of more than $100,000. Perhaps in the past it was worth the money to go to Yale if you had the money, but that may not be the case anymore. Let’s look at the math behind going to Harvard or Yale and going to a state school and investing the savings.
Ivy League School: In the first scenario, imagine that you go to Oxford or Yale and have a tuition cost of $40,000 per year. Let’s say you have the money – no student loans are needed. Let’s further assume that you take 5 years to graduate. When you get out in five years, you start a job paying $2,000 per month more than you would have been paid if you’d gone to a state school instead.
State School: Let’s assume you go to a state school at a tuition cost of $10,000 per year and that you invest the $2500 per month you would be spending on ivy league tuition in mutual funds while you are attending school and earn 8% per year (this is less than the long-term average rate of return for equities to account for returns perhaps being lower over any given 5-year period). Once again, you take five years to graduate. At the end of five years, you continue to reinvest the money you accumulated, but now the annualized rate of return is 12%, the long-term average, since you are investing for a longer period of time and are more likely to hit a period of high returns.
Here is the difference in what you would have in the bank from graduation onward if you went to the state school instead of going to the ivy league school:
Time State U – Ivy League Return
10 Years $366,000
20 Years $1,520,000
45 Years $38.5 M
So, while you’ll make $1,080,000 more in salary over your working lifetime of 45 years by going to the Ivy League school and getting a better paying job, you’ll actually make almost $39 Million more by attending the state school instead and investing the savings since the return on the money you saved will more than make up for the lower salary.
Bottom line is that going to an Ivy League school is really like buying a new car. It is a luxury and really amounts to an expense rather than an investment. You can spend a lot less and still be ready to get a good job.
On average, it really won’t be worth the extra money for tuition. If you can get a huge scholarship and reduce the tuition significantly, it might be worth attending Princeton instead of Ohio State University. If you have millions of dollars anyway so an extra $40 million over a lifetime won’t make a big difference, then it might be worth it as well. If you are coming from a middle-class family, however, and you’ll either be spending a fortune your family has saved or, worse yet, taking out loans to go, you are probably wasting your money. Instead, save the money and go to a state school. If you can graduate debt free you’ll be at a much better starting point for life.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.