Some people have argued that the high cost of a college education is a bubble waiting to burst. They draw superficial comparisons with the housing market, pointing out the high cost, heavy financing with no down payment, federal subsidies and tax deductible interest. But unlike a house, a college degree is an asset that enables theproduction of income. In a July 2007 paper in the peer-reviewed Journal of Student Financial Aid, I demonstrated that a bachelor's degree on average increases lifetime income by $1.2 million as compared with a high school diploma, representing a 27% return on investment. Analyses that are based on medians instead of means, such as those conducted by Sandy Baum of the College Board, demonstrateabout half as much of an increase in lifetime income. But there is still a net financial advantage to pursuing a college education. College graduates also experience lower unemployment rates. People with a Bachelor's degree or higher have unemployment rates that are about half the unemployment rate for people with just a high school diploma. For example, Bureau of Labor Statistics data shows that college graduates with a Bachelor's degree had a seasonally-adjusted unemployment rate of 4.7% in July 2009, compared with 9.4% among high school graduates.These cash flow analyses consider not only the cost of education and the accrued interest on the student loan debt, but also the opportunity cost of not working while one is in college. The payback period for a Bachelor's degree is 11 years at public colleges based on median income, and 18 years at a private nonprofit college. The payback period is 5 years shorter for Associate's degrees because the cost of education is lower, the cumulative debt at graduation is lower and the time to graduation is shorter. The payback period is 2-6 years shorter for minority students than for Caucasian students because a college degree conveys more of an improvement in annual income for minority students. However, the financial value of a college education depends on the degree and the major. The increase in lifetime income for an Associate's degree is about half of that for a Bachelor's degree. Students who pursue degrees in science, technology, engineering and mathematics will earn higher salaries than students who pursue degrees in art, music, history, culinary arts or sociology. Students who attend more expensive colleges, switch majors or take longer to finish will accumulate more debt, making the cost/benefit ratio less favorable. Liberal arts degrees may be intellectually satisfying pursuits, but they don't have the same payoff as high technology fields. As a good rule of thumb, students should not borrow more for their education than their expected starting salary after they graduate. Students who borrow more than twice their expected starting salary are at high risk of defaulting on their loans and will need to rely on income-based repayment to have monthly loan payments that are more affordable. Students who borrow more than $25,000 for an Associate's degree, $45,000 for a Bachelor's degree, $75,000 for a Master's degree, $100,000 for a PhD, $160,000 for a law degree and $215,000 for an MD are probably overborrowing. Students who are pursuing degrees in less lucrative fields should cut these thresholds by at least one third to one half. With the advent of the current economic downturn, college costs began increasing faster than incomes. If this trend continues, it will erode the cost/benefit tradeoff and lead to a situation that is not sustainable. For now, however, the increase in lifetime income presents a compelling argument for pursuing a college education so long as students resist the temptation to overborrow. There are also a variety of non-financial benefits to a college education such as improved health and better life expectancy.
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