Is College Worth It? Not If You Want to Be Rich
According to experts, on average, college graduates earn $1 million more over their lifetimes than high school graduates.[1] That sounds great, sign me up, right? But considering that the average college graduate owes an estimated $28,650[2] in student loan debt (and this number is clearly rising), one starts to wonder if we’re reaching a tipping point; where a motivated and intelligent high school graduate can be financially better off by foregoing college all together and immediately enter the workforce.
What kind of dystopia is this you ask?
It’s absolutely true that your earnings power increases in direct correlation with the level of education you’ve obtained and the numbers prove it. According to the Bureau of Labor Statistics[3], in Q4 2018, average weekly wages for high school graduates, 25 years and older, were $746/week compared to $1,205/week for bachelor’s degree holders and $1,544/week for graduates with advanced degrees. Annualized, those average salaries come to:
High School Degree - $38,792
Bachelor’s Degree - $62,660
Advanced / Master’s Degree - $80,288
The difference between a high school degree and a bachelor’s degree amounts to $23,868/year. Compounding that with 2% wage inflation over a 40 year career, the difference in total earnings amounts to a staggering $1,441,675!
Stick it out for another two years and earn an advanced degree and you can expect to earn an additional $1,064,766 beyond bachelor degree holders. That’s some serious money. Good job experts, the math checks out.
It’s rare that our government gets it right (we love the government, please don’t come after us) but the evidence is clear as day. But today we’re not so sure that the old narrative still holds true. You know the one – that people always ends up better off financially from attending college. Because after all, what does it matter how much money you make if you don’t get to keep it?
On a Long Enough Timeline, We’ll All Be Millionaires
Albert Einstein was once quoted as saying, “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.” If the greatest mind of arguably any generation held compound interest in such high regard, it is a lesson worth learning for all of us. I wonder if we would have all been better off learning about Einstein’s principles of investing and interest compounding in our time at school versus the theory of relativity.
In a world where student loan debt, a $1.5 trillion dollar U.S. crisis that has become a leading form of consumer debt, second only to the mortgage debt, it stands to reason that those with college degrees have clearly become victims of the 8th wonder of the world that Einstein was referencing.
We all hear about the horror stories of graduates with crippling debt, being forced into bankruptcy, taking on second jobs, or having to move back in with mom and dad. Toss in an unexpected medical emergency into the equation and it may seem like there is no way out for these folks.
The recent student loan crisis has created such a drag on society and those debt holders, that some now consider millennials a lost generation. How depressing is that?
Eventually though, as impossible as it may seem for some of those individuals today that are living in this dark reality, the truth is that the vast majority of these debt holders are actually going to pay off those student loans. Earning well over a million more dollars more over the course of their careers than their high school counterparts, and assuming a relatively stable career while living within their means, how could they not pay off their student loan debt?
With the higher earning potential of a college degree, it’s at this point that our college graduates can begin accumulating some serious wealth through retirement accounts, home ownership and other investments. And on a long enough timeline, over the course of their career, they will be positioned to surpass their high school graduate counterparts in personal net worth and eventually become a millionaire.
But just how long is this timeline to reach a level of prosperity beyond a high school graduate? A long damn time, and unfortunately, it’s only getting longer each year. And in a few more years, there may be no mathematical justification at all for continuing education post high school.
That shocking and radical statement runs counter to everything we have been programmed with over the last 40-50 years as a society. Can you possibly be better off financially by skipping college and entering the workforce immediately?
Let’s take a look at the numbers…
All Things Being Equal
According to a BLS Consumer Expenditure Survey in 2017[4], the average annual expenditures for a single person under 25 years old was $33,629. Measuring for inflation, we can estimate today’s average person under 25 has annual expenditures of $34,988.
Let’s assume our high school graduate immediately enters the workforce at age 18 and goes out on their own. With average annual pay for high school graduates at $38,792, their after tax income virtually assures them they have no chance of saving. This narrative is consistent with numerous recent studies stating that the majority of Americans have less than $1,000 savings.
Now let’s also assume those Bachelor’s and Advanced/Master’s degree holders enter the workforce a few years later with roughly the same annual expenditures as our high school graduates.
While these individuals have nothing but debt to their name upon graduation, by paying their debts off and investing all additional funds into a 60/40 stock to bond investment portfolio earning 9% annually[5], it will only take them a few short years to surpass high school graduates in total net worth.
Four More Years, Four More Years
In our scenario above, we assumed our high school graduate branched out on their own at age 18, free from their parents rule. But what if instead of breaking free from mom and dad, they are able to make the simple decision to stay at home for just four more years (or just shack up with a few friends to minimize expense), during this same period of time that everyone else is off earning their bachelor’s degrees?
Even with covering basic living expenses such as transportation, insurance and personal expenditures, the net result of staying at home, exercising a bit of frugality and saving the majority of one’s income for just four more years creates a dramatically different outcome.
Just that one simple decision of deciding how to spend the four years upon graduating high school can have a significant impact on your ability to increase your net worth.
The most interesting fact is that after age 21 when our high school graduates go off on their own, with their relatively low wage, each successive year their net savings are virtually zero or even negative, however, their money saved from their first four years continues to grow due to that magical phenomenon, compound interest.
While these early years certainly do favor our high school graduate in the scenario above, the bachelors and advanced degree holders will eventually surpass them in total net worth – at age 36 for the advanced degree holders and age 40 for our bachelor’s degree holders.
And as for millionaire status in the scenario above, the advanced degree holders will first arrive at age 42 with bachelor’s degree holders earning that status at age 45. But just three years later, at age 48, the high school graduates will also become millionaires. It’s at this point that future earnings become less and less important as compounding takes hold for the majority of future wealth gains.
Does More Money Make a Better Life?
Thus far we’ve established that when all else is equal, in the long run, it pays to continue your education path beyond high school. Sure the high school graduate has a head start on saving and investing versus those attending college but eventually, on a long enough time horizon, high annual income win’s the game. If only it were that simple.
America is a culture that celebrates status, and with that, the things that we buy help to tell a story about us that we want others to see. As we find success in our careers and ultimately make more money, a tiny voice inside of us gets louder and louder, telling us it’s time to start enjoying the fruits of one’s own labor.
This is where lifestyle inflation comes in, which is one of the leading causes of wealth destruction in America.
How many bachelor’s and advanced degree holders do you know that continue to live below their means well into a successful career? By below their means, I’m envisioning a paid-off, non-elegant car (a beater), a small, modest residence that’s not in that hip, overpriced neighborhood, and a person who shuns going out to eat in favor of cooking seven days a week to save money.
Basically we’re talking about someone who doesn’t play the “keep up with the Joneses” game at all. I’m guessing that you don’t know too many people like that and if you are one of them, congratulations, you’re the exception.
Pop quiz, who do you think is more likely to spend more money on clothes for work, have a luxury vehicle, buy a bigger house or go on fancier vacations? A plumber or a pharmacist? A cashier or a lawyer? A school teacher or a doctor?
You get the picture. And for even the most frugal, lifestyle inflation creeps in.
We aren’t saying lifestyle inflation is all bad and in fact, given enough resources I’m positive almost every human being on the planet would spend more if they felt they could.
As an example, think about two parents decision to buy a home in a more expensive neighborhood simply to offer their children a chance at a potentially better education and grow up in a safe neighborhood. Or for those of us who are health conscience, the ability to buy organic foods and grass-fed meat might sound very appealing. Even just the simple act of giving money to charity is a form of lifestyle inflation.
We know that societal pressure and temptation to spend more money will only increase as your status is elevated within your career. Further, we assume you will take advantage of the many ways you can spend that additional money towards a healthy, more balanced and safer life.
It’s only natural to spend a little more money when you make more money. There might be something wrong with you if you didn’t. However, once you introduce lifestyle inflation, it will absolutely slow your ability to save and grow your investments.
This brings us back to our bigger question – does it still makes financial sense to go to college, knowing that inevitable lifestyle inflation will creep in? Further, is there a reasonable percentage increase to account for lifestyle inflation without damaging your future?
For our final example, let’s assume one increases their lifestyle modestly, only spending 25% of the additional gross money they might earn over a high school graduate. That’s a very conservative estimate as the data[6] says most Americans would increase spending by more than $2,500 given a $10,000 a year raise (actual 62-65% increase). But for arguments sake, let’s run the math, assuming our bachelor’s and advanced degree holders are unusually frugal, with only a modest 25% increase in spending with their additional earnings.
This chart is a bit shocking right? Turns out those doctors, lawyers, scientists and professors won’t surpass a high school graduate’s net worth until age 53! That’s if they survive the inevitable career burnout periods that visit nearly all professional lives.
As for the bachelor’s degree holders? At age 65, they will remain almost $750K behind our savvy high school graduates in total net worth. What’s even more sobering is they will mathematically NEVER pass the high school graduate, despite a lifetime of higher earnings throughout their career.
Lessons and Takeaways
We can’t say if someone should go to college or not but it’s important to note our world is a very different place than it was just a decade ago. We do advocate looking at the bigger picture as it’s clear that when person can earn millions of dollars more over the course of their career and still be worse off financially, things aren’t as black and white as they might appear.
In the internet economy, it’s now easier than ever to acquire job specific skills for free, skills that can pay even a high school graduate a healthy income for many years. Automation and AI development is moving at such a rapid pace, who knows what type of jobs we’ll all be doing in 20 years – we must be willing to adapt and be flexible. And the recession of 2007-2009 taught us that no job is secure, no matter how intelligent and hard-working a person may be.
The bottom line is that it might not be so wise to invest hundreds of thousands of dollars into an education of potentially little value to a future economy.
Ironically enough though, if it hadn’t been for college, I might not think the way I do today about saving, investing and entrepreneurship. I certainly wouldn’t have the lifetime friendships I have today. In fact, this very Master Millennials’ blog was started by two college friends who have both seen some of these scenarios play out in real life. We have both fought the student loan and lifestyle inflation battles and we know your pain.
Despite my obsession with crunching the numbers, I know that the optimal life strategy can’t be summed up in a spreadsheet – we all come from different backgrounds and experiences, all with unique personal needs and wants. Further, there is more to life than just endlessly growing your net worth.
However, it’s important to at least try to understand your rationale and goal(s) for any choice you make, especially those decisions that will have a huge financial impact on the rest of your life.
Is college worth it? You decide.
References:
[1] College Scorecard from the U.S. Department of Education - https://collegescorecard.ed.gov/
[2] The Institute For College Access and Success - https://ticas.org/posd/home
[3] Bureau of Labor Statistics Weekly Wage Report 2008 - 2018 – United States Department of Labor - https://data.bls.gov/cgi-bin/surveymost
[4] Bureau of Labor Statistics, Table 1300. Age of reference person: Annual Expenditure Mean, Consumer Expenditure Survey, 2017 - https://www.bls.gov/cex/2017/combined/age.pdf
[5] Historical Vanguard Portfolio Allocation Models - https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations?lang=en
[6] Bureau of Labor Statistics, Table 2010. Average expenditures, Highest education level of any member, Consumer Expenditure Survey, 2017 - https://www.bls.gov/cex/2017/combined/educat.xlsx