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ROI of College Going Way Down

It’s fall, and that means college for millions of kids who have no idea why they’re going back to school even after The State has freed them from the educational industrial system (i.e. the little rooms ruled by the boring adults they were locked up in for twelve years). It also means the media will report out-of-context statistics about the value of college to fool people into wasting more time and money on a failing asset:

“Despite falling wages and rising tuition costs, the value of a college degree is still unquestionably high, a new report shows.

A college degree today is worth $272,692 in lifetime wages — more than three times its value in the 1980s ($80,000) and more than double its value in the 1970s ($120,000), researchers from the Federal Reserve Bank of New York found. At its highest point, in 2001, the net value of a college degree was $338,000, according to raw data from the report.

But the Great Recession, which brought widespread underemployment and record-breaking student loan debt for college graduates, has greatly slowed that growth spurt. The value of a college degree has fallen 11% since 2007.”

I grabbed the graph in the article:

NPV Bachelors Degree

Looks like a good deal, but… context. Net Present Value is great, if it is presented with other metrics like opportunity costs and return on investment (ROI). A quick Google search finds the following graph about the rising costs of college (and this graph is in agreement with hundreds of others based on universally accepted data):


As one can see, the costs of college are quickly approaching the NPV of a college education.

In 1980, you are getting a 6:1 return on investment with a college degree, but by 2006 you’re down to 2:1. And remember, NPV here is calculated for the lifetime of the graduate. Most investments that take fifty years to get the full return on investment are expected to do better than a simple doubling (this is a gross simplification of NPV and ROI, I know we’re not technically talking about a “doubling” of the investment, but there’s no reason to get too complicated here.)

Since all resources have alternative uses, what if you took that 120,000 dollars and invested it in the world economy through something like Vanguard’s Global Equity Fund? It turns out you can expect a 9% annual return (assuming a lack of alien invasions or deadly meteors or other calamity) on that investment. This investment has a NPV of $322,000 assuming a 2.2% annual inflation rate. If you add four years of full time work at minimum wage to that number you get $386,000 dollars. So not going to college, getting a job, and investing the resources it would take to go to college and putting them in the market gets you a larger return than a college diploma. This is just an example, I obviously don’t have the clairvoyance to predict if the global economy will grow at such a rate. I present it only to point out what is missing from the article.

The value of a college diploma is going down while the costs are going up in a flailing national economy that has a ridiculously high underemployment rate. Borrowing to pay for college is considered a wise move by most of the people talking to these kids. Someone needs to present an opposing view so they understand the risks. In my view, college students are heading towards a cliff. And the rest of us, especially our media, need to get serious about the problem.

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