by Brandon Reiter
‘You need to go to college to get a good job and make a good living’ is what my generation (Millennial) has been the story told by our parents (Boomers) since we were young. But times are changing and the cost of a Bachelor’s degree keeps rising, so let me ask the question, is a college degree really worth the investment? Is there a college tuition bubble that is primed to burst in a matter of time?
Of course, this is a pretty complicated question as there are many types of jobs, schools, and factors that go into this. Nonetheless, based on recent data I believe that a bubble is growing in the education world, specifically for private institution 4-Year bachelor’s degrees.
Before I dive into the numbers, it’s important to understand how bubbles form and why they burst…
The most famous bubble bursting in recent history was the US Housing Market in 2008, which led to the Global Financial Crisis. In this instance, people were borrowing money to purchase houses they couldn’t afford due to the expectations that they would be able to sell that house in the future for much more than they bought it for. The banks that loaned people this money either believed it too, or were just very greedy and turned a blind eye. Either way, housing prices began to drop and people were unable to pay their mortgages and the banks who loaned the money needed government bailouts.
Now think about this in terms of the price for a college degree. On average, students who graduated from a private 4-year university spent approximately $126,000 for their education. In 2021, the expected starting salary for a college graduate with a bachelor’s degree after taxes was approximately $43,000. The median salary in 2021 for a person who graduated high school but did not attend college was approximately $30,000 after tax. Over the last 10 years, the average wage increase across the board has been 3.28% which has only outpaced inflation by 1.4% (this is not including the anomaly that is 2022 inflation). Based on these number, the average college graduate can expect to take home approximately $240,000 over the next 5 years after tax, while the average non-college graduate can expect approximately $180,000, a mere $60,000 difference.
Since a college graduate will only make $60,000 more than a non-college graduate over the first 5 years of their career on average, we can take a look at what that means for the return on investment for that degree they paid $126,000 for. Since they only made $60,000more over those 5 years than they could have if they decided to forgo college, the return on their investment (ROI) will be approximately -53%. It would take them 11 years just to break even on their investment, and another 7 years to double their investment. In other words, it will take about 18 years just to double the investment of a private education which is an annual yield (APY) of just 5.6%. For comparison, the S&P 500 has had an average APY of approximately 10% over the last 50 years.
Alternatively when you do the same math with the price of a public bachelor’s degree the numbers look much better…
As of 2021, the average 4 year cost for a state school was approximately $30,000. Assuming the same salary figures as above (which is a stretch), it would only take a public school graduate 3 years to break even on their investment. Over the same 18 years they will have made nearly 7.5x their investment, which is an APY of about 41%.
Like I said before, there are plenty of other factors to consider. For instance, most of the country’s top schools, in terms of mid-career salary, are private institutions. But when you look at the top state schools they’re not too far behind. UC-Santa Barbara had the top mid-career salary for a state school as of 2021 ranking them 21st overall and just $20,000 behind the #1 school, MIT, while a private institution, is a land-grant university, meaning it receives government funding unlike most private universities.
While it is tough to definitively answer whether or not the price of a degree is worth it, the numbers are starting to tell a story. They are telling us that an affordable degree could be well worth your investment. This notion can lead to more and more college applicants to go this route instead of an overpriced private institutions.
Just like the price of houses, if students were to keep borrowing money to pay for extraordinarily high private education tuition, it could end up taking them decades to recoup their investment, in turn leading to significant regression in the price and feasibility of a private university education, as well as reluctance from lenders to even fund these educations.