There will inevitably be someone in a net worth related article comment how he or she isn’t doing so great due to all of his or her student loans. Because so much of wealth creation is about having the right positive mindset, I fear folks burdened by heavy student loans may be dragged down by a defeatist mentality.
I’d like to change this mindset by placing a specific value on our higher education. The older I get, the more I realize education is the most valuable asset of all. Education is what will break the poverty cycle. Education will provide the means for people to become better communicators, better employees, better entrepreneurs, and better citizens. Yet curiously, we pay our high school educators some of the lowest wages and charge exorbitant private college tuition. Sounds like a good business to own!
Nobody spends money on things that aren’t worth its value unless they are being extorted. The item might lose value over time, but at the time of purchase the value is worth exactly its price. So when someone comes to me and says they have a negative net worth of $30,000 due to $35,000 in student debt, I’m going to counteract their belief by asking what they spent on their college tuition to come up with its value.
DECIDING ON HOW MUCH TO PAY FOR COLLEGE
There’s one simple financial rule for deciding which college to pay for. The total tuition cost for getting a diploma must be no greater than the expected full-time income of your first job. Your expectations may turn out incorrect, but you’ve got to at least do research to figure out what the expected wages are for various positions of interest.
Example #1: I went to William & Mary, a state school that cost $2,900 a year in tuition from 1995-1999. $2,900 X 4 = $11,600. I would need to find a job in 1999 that would pay me $5.60 an hour compared to the then minimum wage of $4.25 an hour to make attendance worthwhile. I strongly believed I could find a $11,600 a year job because I was the best damn Egg McMuffin maker during my time at McDonald’s! Besides, I frequently saw friends of equal academic stature get jobs for $30,000 a year or more out of W&M.
Decision: Attending W&M was a no brainer and is still a no brainer for in-state students where tuition and fees total $7,700 a year. You should be able to get a $30,800 a year job if you get a full-time job today. If we were to just look at W&M’s tuition of $5,400 a year, then getting a $21,600 a year job should be relatively easy.
Example #2: Boston University tuition is currently $43,000 a year. The total tuition cost over four years is at least $172,000. The probability of landing a $172,000 full-time job right out of BU is probably less than 0.1%. But as Jim Carrey says in Dumb and Dumber, “So you’re telling me there’s a chance? Yeah!”
Decision: It’s probably not a good idea to go to Boston University without scholarships unless your family has a lot of money. Consider U. Mass, Harvard or MIT instead if you must go private in Boston.
Example #3: You attend University of Michigan as an out-of-state student who pays out-of-state tuition of $20,500 a year compared to $6,750 for in-state students. The estimated four your tuition cost is roughly $82,000, which is not bad compared to private schools.
Decision: UoM is one of the top five state schools in the country with an enormous alumni base. Finding a $82,000 a year job is possible nowadays in tech, internet, banking, and management consulting if you are a top student. Green light, even though that’s a Michigan State color.
Example #4: You attend Princeton University with a need based scholarship of $15,000 a year that brings down annual tuition from $41,750 to $26,750. The total estimated tuition over four years is a more digestible $107,000.
Decision: Princeton is perennially one of the top five universities in the world. After bonus, you have a shot at making $107,000 a year after your first full year of work. First year investment banking analysts have a base pay of $70,000 – $75,000 with a bonus of $20,000 – $50,000 for example. There are Princeton clubs in all major cities thanks to their strong alumni base and huge university endowment.
Example #5: You attend Chico State University for $7,000 a year as a California resident. It takes you 5.5 years to graduate at a total cost of $38,500 because you receive no help from your parents, the school, or the government. You’re working summers and part-time to get a college diploma. Solid effort!
Decision: Graduating from Chico State is much better than not graduating from college at all. It may be better to lower your tuition cost by attending community college for the first two years at $1,500 a year, and trying to graduate in 4.5 years to knock off a total of $10,000 from the education. $28,500 a year is a much easier target to achieve as a first job than $38,500 from Chico.
VALUING A COLLEGE EDUCATION
Now that we understand how much to pay for college, we must now value the college education as part of our net worth. Intellectual capital’s value is highly underrated because it’s not tangible. Yet higher education tuition is largely inelastic thanks to tremendous demand. How inconsistent is that?
Because we structure our college decision based on the expected value of our first full-time job upon graduation, then we must assign an education value that is equal to our full-time job’s annual total compensation.
We do not know during college whether we will be able to earn more than our total tuition cost. But we will all eventually find out whether our estimates prove correct or not because the large majority of us will eventually land a full-time job at some point. This is where the initial rise and fall of our college education value comes into play.
Example #1: My first full year base salary was $55,000 back in 2000 (it was $40,000 when I started in the summer of 1999). I could therefore value my college education not at $11,600 (the cost of four years of tuition), but at $55,000 in my net worth calculations if I was that big of a personal finance nerd back then. The calculation should be on total compensation, but I am reluctant to share my first full year bonus at this time. Because I didn’t feel encumbered by a negative net worth, I took way more risks the first two years than I would have otherwise. Part of it paid off through a lucky stock purchase. Part of it didn’t pay off because I was too cavalier with my career.
Example #2: The Boston University graduate finds a full-time job for $50,000 as a marketing analyst. $50,000 is a very admirable salary, but the value of his education declined by $122,000 ($172,000 tuition – $50,000 salary). Let’s say he calculates his net worth as negative $40,000 due to $30,000 in student loans, $10,000 in credit card debt, and $0 assets. He can actually increase his net worth by $50,000, the new lowered value of his education based on his first year’s annual income. Being able to believe in a positive $10,000 net worth vs. a negative $40,000 net worth should help this student be more confident. With more confidence, comes more achievement. With more achievement comes greater rewards and happiness.
Example #3: The University of Michigan graduate leaves the frozen plains for a tech job at Google for $65,000 + $15,000 in stock options. The value of her $82,000 education only lost $2,000. Instead of starting off with a negative $20,000 net worth due to some student loans, the new Google employee has a net worth of roughly $60,000 ($80,000 value of education – $20,000 in student loans) her first year out of school. Landing a job at Google is already like winning the lottery. To assign a value to her lottery winnings should make her feel even better about life.
NET WORTH GYMNASTICS
The whole goal of this exercise is to get parents and high schoolers thinking about the cost benefits of going to a particular college as well as giving people with heavy student loans the belief that things aren’t so bad. Net worth calculations are largely academic because until there is a liquidation of your assets or an income realization from intangibles, everything is subject to change.
The risk of assigning value to education is the delusion that you are worth more than you really are. When you are delusional, there’s a chance you become over confident and take excessive risk. Risk taking is great, but there needs to constantly be an analysis of risk and reward. If you don’t calculate a realistic reward scenario, then you are facing asymmetric returns which could prove devastating to your finances in the long run.
Valuing your college education equal to your first full-time job’s total compensation makes a lot of sense in the short run. In the long run, the value of a college education really starts to compound towards the ultimate goal of absolute freedom. So the question becomes: How much is freedom worth to you? Priceless I say.
To Summarize:
1) Initial college education value = what you pay in tuition to achieve your diploma. You wouldn’t pay the tuition if you didn’t think the college was worth it.
2) Real college education value = total annual compensation for the first full year of work after graduation. Time to face reality and see what the diploma gets you.
3) If college X’s tuition is less than or equal to the expected total salary of your first year post college, then it is economically fine to attend college X. You never know the future, but you should have a good sense of how much your desired occupation will pay.
Related: The Average Net Worth For The Above Average Person
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Interesting way of looking at it. I do think it’s a problem that people are taking out student loans without really thinking about the consequences, but I also think it’s gotten to the point where it’s slightly overblown. “Student loan” has become a bad word when the reality is that if they’re used smartly they can be INCREDIBLY valuable. The problem with that kind of nuance is that it puts the burden back on the individual to make smart, thoughtful decisions, which is a lot harder and more emotionally challenging than just saying “STUDENT LOANS ARE EVIL!!!!”.
I wonder, those really burdened by student loans… whether they are writing thought pieces or helping educate others about the pitfalls of taking on too much debt for education.
It would seem that there would be a natural course correction to pay less for education given the cacophony.
Unemployment rate for a college grad is 3.3% per the BLS.
Just being employed is going to put a person on a positive trend.
According to the Census, a household with a bachelor’s degree has a median income of about $73,000. So….. Over a thirty year career that would be about $2.2million in today’s dollars.
Throw in the fact that college graduates are more likely to find positions with good working conditions and great benefits.
And then there is the intangibles of a college education; living a more enlightened/interesting/informed life.
Seems like a good deal to me!
I suppose you can include it anecdotally. For things like lending/margin disclosures I can’t imagine it would be advisable.
There’s obviously no “perfect” way to value it (IMO) but yours is as good as any I’ve seen. I like the one year salary for a four year degree and have been mentally using that for a while.
The way I see it is like valuing a small business. If I’m spending 100,000 and four years of my study to start my business (in this case a career) I don’t want to wait 10 years to “break even.”
I like to also look at my expected salary for not going to college or for doing another acceptable alternative to put it in perspective. So if I can spend $10,000 to start at $50,000 or $75,000 to start at $75,000, it might make me think twice, assuming expected peak salary is the same. It would take several years of after-tax extra earnings to make up the difference in salaries/college costs, and by that time the $50,000 salary may have caught up with the $75,000 salary through changing jobs, rocking it at the current job, or some self-employment thing.
The payback period is anotrr good way of looking at the cost benefit for sure.
I love the idea of valuing the education itself! It’s a real asset that I’ve never heard anyone try to measure. However, I think we’re underestimating its value. Higher earnings from a B.S. or B.A. are likely for one’s entire working career. Might the delta between a specific degree’s earnings and that same person’s potential earnings as a high school grad, multiplied by the number of years in his or her career, get at truer value? (e.g. – Michigan grad can expect $30k in additional earnings, every year, for 40 years). Of course, this methodology almost always points students to go to some college (with some notable exceptions, depending on your field of study). But then the evaluation just points to which college provides the best value.
Kind of makes sense to value our education given all the time and money we spend on it yeah? Lots of different deltas. I’m hoping to just simplify the formula and let everything else take care of its own.
Definitely worth spending the time to run the numbers on your college education.
As a multiple UC grad, I appreciate the quality and value of a top notch public education. But I’ve also seen the shenanigans that take place at institutions to attain a higher ranking in the various college ranking systems.
So if you’re doing a cost-benefit analysis of particular institutions, make sure you talk to graduates of each one about the true value of their education rather than going by published rankings. Graduates know not just how expensive it was, but more importantly, how valuable it is.
My undergrad – spectacularly valuable. Grad school? Valuable, but too expensive.
I think college is fantastic, but I also think people and college focus too much on getting a job after college instead of running a business. The real money and freedom is when you have control of your work and are not working for someone else.
Definitely. What business would you have pursued if you did not take over your dad’s company?
Very good food for thought. I never thought about this before. I came out ok with my first full year of compensation. Some really great things to think about if I ever have kids to put through school.
I’ve never really thought about this before. I was lucky enough to be able to graduate with zero student debt, so it would definitely change my networth calculations. That piece of paper is worth something after all!
Even though it has value, I feel it is intangible, and would have a hard time adding it to my spreadsheet. But like you said, for a student right out of school it can be a great mental boost for how well you are doing, even though you feel as though you are drowning in debt.
A right mindset really is everything to building outsized wealth. Got to believe and be optimistic!
This concept is something my parents drilled into my head throughout the college application process. “Don’t get a degree that costs more than you’ll make with it” they always used to tell me. I guess it paid off, I graduated with no debt (thanks to holding down a part time job thru my 4 years) and my first job paid me $35k, which was probably the slightest bit more than my education cost with in-state tuition rates.
I think your examples are all very good and they make a ton of sense. Another thing to consider would be your major and your potential job after graduation. Would a degree in say poly-sci from Princeton also be able to net you over $100k in your first year? If not, would it still be worth it? Although it could be worth it if you can take that degree and turn it into a Harvard law degree or something similar.
I think one big issue with the student loan issue is how many 18-year olds think about the value of their college tuition in terms of potential income? I was just thinking the other day about college classmates whose parents were paying for their tuition and had offered to buy them a new car if they chose to attend an in-state public university instead of the private college we were at because it would be so much cheaper. I knew several kids whose parents made that offer. The emotional attachment of *having* to attend these crazy expensive universities doesn’t just apply to kids who have the luxury of their parents paying the bills. I know people who had undergrad loans from attending private universities, then took on more loans to attend law school and only after getting a job and practicing law for a few years did they look back and regret taking on such huge debt, even though they were making bank. And these are very smart people too.
There’s an irrational emotional side to us that causes us to make these decisions. There needs to be a psychological change in how we look at the value of college. I think your examples are a great way to look at it, but unfortunately that’s not how most high school students, counselors, parents, college admissions, etc. look at it. Hopefully more people start discussing the value of college in these terms.
“I think one big issue with the student loan issue is how many 18-year olds think about the value of their college tuition in terms of potential income? ”
If the kids aren’t thinking about it, the parents should bring it up and have that talk, especially since they are probably paying!
I hope by writing this article it can be shared around to other high schoolers and parents to help prevent future blowups.
Lawyers seem to have the highest regret… 65% is one stat I read.
I wouldn’t really agree with placing a dollar value on your education and then including it as an asset for purposes of net worth since it’s a non-transferable asset and would likely lead to overconfidence and excessive risk taking. When it comes down to it, your job isn’t a way of selling your education since you still have your education at the end of a year of employment; it’s a way of selling your time.
But I definitely agree with the idea that you should always compare the cost of the education with the benefit that you’ll get from it- though I like to limit the benefit consideration to the marginal benefit. For a new graduate this is typically the entire starting salary – or the value above a minimum wage, but for someone returning to school, it’d be the difference between what they earned before and after.
A friend of ours is enrolling in an Executive MBA program that he’ll pay $80K for. I think it’ll be an awful investment of his time and money. The average salary of the program 1 year post grad is just $62K, which is actually less than he earned last year. Even if he boosts his earnings from $70K to $100K (possible, but a significant outperformance of his MBA program’s peer group), he’s still looking at a payback period of several years accounting for the raises he would have naturally gotten in his current position as well as interest paid on the loans he is taking out to pay the tuition. But he really wants the perceived prestige of an MBA, so who am I to tell him how to spend his money?
Suggestion on another way to value college education then to help folks make a more informed decision?
I think that is a really good point you bring up with how to value the benefits that a college education brings. I think there is a correction though that needs to be done. We need to subtract the salary that a high school graduate could attain. I don’t know the perfect number to work with but minimum wage seems like the easiest place to start. This is because you can easily get a minimum wage job with a high school degree. That works out to around $15k for the year if you work 40 hours a week 52 weeks a year.
So if you found a job right out of college making 50k a year, the value of your college education would be 35k. Since that’s the extra income your education capitol was able to secure. I think this method provides a more realistic picture since your starting point is usually a high school diploma.
Good point about exing out the salary that a high schooler could get. Perhaps that is simply minimum wage then.
I like my formula b/c it is simple. When too many variables get added people start to get confused. Just like the simple 1/10th rule of car buying.
*W&M’s tuition and fees is listed as about $7700 per semester so $15,400 for the year. 7700 for the year sounded absurdly low I had to look it up haha.
https://www.wm.edu/admission/financialaid/tuition/index.php?svr=web
Crazy right? Tuition is only $5,500 TODAY! I included the Fees b/c it’s mandatory.
W&M is great value or in-state students.
Don’t forget the big picture and don’t fall prey to short-term thinking: first year salary is just one data point. If Princeton is $108k but your first year salary is “only” $70k it probably is not a bad investment considering the longer term prospects.
Who has the highest and more sustainable competitive advantage between a Harvard Grad starting at $60k and the UCLA grad starting at $80k? I would say that the strength (quality) of the alumni base, the recognition of the school and prospects would be a huge edge for the former. 10 years down the road he might be at $300k when the UCLA is holding steady at $150k.
My point is: best use is slightly longer term thinking, perhaps Present Value of Expected Future Cash Flows. For more ideas research the concept of human capital vs. financial capital, and its respective allocation in net worth.
To the person mentioning MBA, same thing. Assume $100k salary and 2 years “lost” in school, a MBA is $200k + tuition. There is a 0% chance that this will be made up in a year, or even three, but many MBA grads will make multiples of their former expected income 5-10 years down the road.
Disclaimer: no MBA here. Just thoughts.
If you create a NPV formula with all the different variables then I fear people will NOT bother to have a conversation and do the calculations. What I’ve found as a PF blogger is that SIMPLE is better to get people talking and thinking about issues.
Of course there is a whole career payoff waiting, but if you can simplify the immediate decision, since who knows the future, the better.
I’m open to a more comprehensive formula that is still simple to understand if you want to share.
Sam,
I have been following your page for a while now and it’s been an eye opener. Funny that you should post this article. Maybe, you or another reader could evaluate my issue. I’ll be 59 this year and plan to apply to a 36 month graduate program. During the program I will not be able to work. I will not need any financial aid while I am in this program. First year salary after graduation is 125,000. plus. At my age, I am worried about being hired after graduation. WHat do you think?
Howdy mate, may I ask how you reconcile knowing you’ll make $125,000 if you’re worried about being hired after graduation?
Depends on what’s in the bank and your aspirations. Gotta share more.
Thanks for this article! It helped me justify my large loan balance. I have a question that maybe someone with more financial wisdom than I do can answer. I make extra payments on my loan every month; should I be applying this to my fixed rate loans at 5-6% or my variable rate loans at 3-4% (approx. same balances)? I understand paying your highest rate first but how do you handle it with a variable rate?
Being a finance nerd as well, it is probably better to include the career you could have had if you did not go to college in the first place.
Ex: Cost of 4 years – Cost of foregone wages + First year income.
This day and age the answer is relatively mixed. There are many jobs that pay very good wages without the burden of 4 years of college. As a quick example, you can work in the medical sector (nurse, x-ray tech) or air traffic controller etc. These jobs pay healthy $60K+ annual wages. If you look at those careers (next to zero cost of schooling maybe a few thousand) it actually blows away a lot of colleges.
All that aside, if you get into a top 25 university, the increase in wages is so high that you’d be a fool to pass it up.
TL;DR? Avoid average private schools that simply don’t offer great job prospects since you’ll be paying 2-3x public prices. If the private school (HYPSM) or public school is highly acclaimed then the career center will give you the truth because they tend to list both 1) job recruiters, 2) job titles and 3) average salaries.
Chico State was the #1 party school as ranked by Playboy magazine back when I was in college. My brother went there. I once went to a kegger at Chico that boasted over 400 kegs o’ cold beer. That has GOT to be worth something. Fun, fun place to be.
Sam, my kid is about to go to college. She wants to be a teacher. Any state school around here is $20K per year for tuition, room, board, fees etc. I wonder if she will be able to land an $80K first year teaching job? Probably not….
This argument reminds me of an instance when I was drafted (1968) into the army. In my basic unit was a 19 year old truck driver who earned $11K a year. My first job (mgnt. trainee) had a salary of $7.5K a year. At first, it bothered me that this kid earned more than me without an education. Roughly 16 years later, I retired (financially independent) and I bet he is still working as a truck driver. An education provides skills that if used well will make you very successful, but there is no guarantee! Probably the best choice is to get a very low cost education as long as it provides the necessary skills for your success. This is the toughest question to answer at 18 years old.
I think what you are missing here is segmentation by major.
The value of a degree is not just which school you go to, but what you study.
In my opinion there is virtually no value of history degree, does not matter if you go to community college or Harvard. On the other hard, if you study computer science at state school or MIT.. either way you are getting a great payback.
The real value of the degree = cost of school – future value of sum of differences between your professional salary and what you would make without a degree.
This is why the value of STEM degrees is going to be very high, and value of most liberal arts degrees is negative.
I love your articles – you always challenge us to think! Thank you!
Should I be valuing a law degree based on total cost of attendance or only on tuition?
I’m trying to decide between two law schools that offered me significant scholarship money. One in TX and the other in NY. The difference in tuition/fees between the two schools is $3400/yr. But where the real difference lies is the cost of living at around $7500/yr.
Higher cost of living areas also tend to have higher salaries. Something to consider. The $11,000 a year difference is $33,000 for 3 years yeah? Not huge, but not cheap either. depends on the quality of law school and what you want to do.