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 the
$1,000 April Scholarship
Easy to Apply
production 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, demonstrate
Get Your Custom List of Scholarships to Help Pay for School. Sign Up Now!
Fastweb is your connection to scholarships, financial aid & more.
about half as much of an increase in lifetime income. But there is
still a net financial advantage to pursuing a college
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
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
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
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.