Is College a Good Investment?

This is a guest post from Jon Haver who graduated from college with student loans and now writes about how he paid them off at paymystudentloans.com

When is a college education a good investment? Of the 15.6 Million undergraduate students who are in university right now, how many have had a serious look at whether their education is a good investment?

I, for one, did not consider if my education would be a good investment, but wish I had given it some thought. In this article I will go over six key factors that will influence if college is a good financial investment and show how you can calculate if your education will be a good investment.

Is College a Good Investment

 

6 Factors That Influence If College is a Good Financial Investment

 

#1 – The Degree You Get

Which major you choose to study will have a significant impact on your income leaving school and as a result the return your investment in education will have.

From a recent NACE study here is the median starting salary by major…

  • Engineering $59,000
  • Computer Science $56,000
  • Business $48,000
  • Health Sciences $43,000
  • Math & Sciences $41,000
  • Communications $40,000
  • Education $37,000
  • Humanities & Social Sciences $35,000

 

#2 – What School You Go To

The school you select will have an impact on the job opportunities available to you when you graduate. Some companies only recruit from a select list of schools and as a result many of the highest paying jobs are narrowly concentrated around a few schools.

Here is a list of the 5 schools with the highest starting salary according to the 2013 PayScale survery

  1. MIT $68,400
  2. CalTech $67,400
  3. Harvey Mudd College $66,800
  4. Colorado School of Mines $64,200
  5. Loma Linda University $63,400

One interesting thing to note is that many of the schools in the top five specialize in engineering degrees which is the highest paying career out of college.

 

#3 – How Long It Takes To Repay Your Student Loans

Like all loans the longer you take to pay off your student loans the more they will cost you.

If it takes you 5 years to pay off $30k in student loans with a 5% interest rate you will spend $3,968.22 on interest. However, if it takes you 25 years to pay off the same loan you will pay $22,613.10 in interest and this will negatively affect the return on your college investment.

 

#4 – How Old You Are When You Go To College

If you are going to school at a later age in life you will have fewer years to earn the additional income a college education provides. If the company you are working for is going to pay for your education than the financial return will be positive.

 

#5 – What Alternatives You Have

Depending on your situation you may in a lucky position where you have a high paying job available to you immediately out of high school. For example, if you can join a family business where a college degree would provide marginal benefit you will end up with a significantly higher return by working for the 4 years it takes to attend school.

 

#6 The Academic Results You Achieve

Just as not all degrees/schools are equal not all students are equal. If you achieve a high GPA you will have a better chance of getting a high paying job.

In a study completed by MIT, there was a +/- $8,000 swing from the median starting salary for students with the best GPA and worst GPA.

So in summary you should go to MIT straight out of high school, study engineering and get a 4.0 GPA – it’s that easy

 

How To Easily Calculate if College Is A Good Investment

Investing is at its core the allocation of scarce resources between alternatives. In the case of investing in your education the scarce resources you will have to spend are your money and your time. The alternative is not going to college and entering the job market right away.

Below is a video that shows how you can make a few assumptions and determine if you think your college education will return a positive ROI.

http://www.youtube.com/v/wEJdfMt8GlY

Want more information? Get the student loan ROI calculator here.

What are your thoughts on whether college is a good investment?  Does your degree matter?

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  • http://evolvingpf.com/ Emily @ evolvingPF

    Woohoo you gave my alma mater a shout-out! It doesn’t often get shout-outs (i.e. it’s not Caltech or MIT) so thanks. That a great percentage of the students at those schools major in engineering I would say is the main reason they top the starting/mid-career salary charts – they generally don’t even offer the low-paying majors.

    I didn’t major in engineering though, and neither did my husband. We’re both science kids. But we went the non-lucrative route to grad school, and I’m sure they don’t count our stipends in their starting salary statistics.

    • http://www.paymystudentloans.com Jon @ Pay My Student Loans

      Emily, I agree if a school specialization is the biggest factor in what schools have the highest paying starting jobs. Which in itself is interesting, it means if your only focus is starting salary than your choice of major is more important than your choice of school.

  • http://worksavelive.com Jason

    Great stuff! I certainly think major matters and that ultimately determines whether or not it was a good investment. It’s ridiculous to go pay $50,000 in education when you have no plans on using the degree you obtained. School selection has to be a hard one though…I wonder what the breakeven is compared to the total increased cost of going to a “fancy” school versus how much more you make upon graduation.

    • http://evolvingpf.com/ Emily @ evolvingPF
    • http://www.paymystudentloans.com Jon @ Pay My Student Loans

      Jason, that would definitely be interesting, I think with the “fancy” schools the payback is on the graduate programs that open up for you vs the undergraduate degree. Harvard Law probably has a decent ROI over normal state school law program however I doubt the ROI for the average Harvard English lit major is substantially higher than the average English lit from a state school. (no facts to back any of that up!)

  • http://thomassmoore.com Thomas S. Moore

    I personally think that all colleges can be a good investment if you actually graduate and get a job for the career. When you think about it if you spend $50k on college and when you graduate you are working in your field and are making $30k per yer with in 5 years without a raise you would have netted 150K. In my eyes it was well worth it, it not the college’s fault if you get in debt buy and expensive car and feel as though you need more money.

    • http://www.paymystudentloans.com Jon @ Pay My Student Loans

      Thomas, I ran your scenario through my little ROI calculator and here is what I got…

      The ROI would be positive only if the alternative to going to school was working for less than $12/hr

      If you got a job for $30k/year after 4 years in school spending $50k on your education you would have been better off working for $12/hr full time through school.

  • http://www.frugalrules.com John S @ Frugal Rules

    Good post. I did a similar post a few weeks ago and it definitely got people debating. I think it can be a good investment, but is one that should be made with an informed decision. Looking at things like major, the amount of loans, etc are key things to look at to determine if it’s a good investment or not.

    • http://www.paymystudentloans.com Jon @ Pay My Student Loans

      John, I think your point is a very good one – it should be an informed decision.

      For me I didn’t consider my ROI when going to school and I think most people don’t. They are told that its a good idea to get an education and then they run with it never considering the alternatives. For some people it works out but for some they would be better off financially doing other things.

  • http://www.financialsamurai.com Financial Samurai

    I really like looking at the 10 years out income figures, given starting salaries are all pretty tightly bunched.

    If it’s a top 10 school, unfortunately, I think I’d pay almost anything for my kids to go. The connections are what matter most!

    • http://www.paymystudentloans.com Jon @ Pay My Student Loans

      Connections is definitely one of the intangibles that isn’t calculated in my model.

      Do you think the connections in an undergraduate program are worth the extra 10-20k?

      I can see the benefit to a top flight MBA program being the connections but for an undergraduate I don’t know how big the added value would be. Definitely would be interesting to know!

  • http://tightfistedmiser.com Andy Hough

    I think there is also value in the knowledge you gain in college even if it doesn’t directly translate to monetary value.

  • http://youthfulinvestor.com Scott @ Youthful Investor

    I am in the camp that parents, educators and students need to stop discounting the value of a community college degree. I am sick of seeing so many of my colleagues going to big universities, taking out huge loans, being told to do what you love and then graduating a year late with a degree that no one will hire them with.

    I love community college because it forces you to actually learn specific trades and skills. You could get away with not learning anything specific in an arts degree whereas it will be a lot more difficult to in a horticulture or nursing program. Another reason is that they cost incredibly less than a private college or university. Very few people need loans for these institutions. Believe me, moving from graduation to the real world feels so much better than starting from zero than in the hole!

    We need to do a better job of being tough on youth and telling them that studying what you love or what you have an interest in is not enough. Do that on your own time. Make it a passionate hobby. If it cannot pay the bills and adds to the financial stress of the rest of the country it’s not worth it. We need to stop giving a negative description to potential careers as electricians, plumbers, construction workers, etc. Aside from what I’ve stated above these are real, marketable skills that will remain in demand for some time and feature very little investment compared to the liberal arts or typical university approach.

    • http://www.paymystudentloans.com Jon @ PayMyStudentLoans.com

      Scott, I agree with you big time! The calculator shown here looks at University degrees but Community College / Trade School programs bread and butter is helping you from day 1 leave with a higher paying job then when you arrived. There is no question the negative stigma attached to trade programs is a shame. The financial prospects for a 21 year old with no debt and a trade(electrician etc) is much greater than a 22 year old with a lot of debt and a BA.

      Thanks for sharing you thoughts on this topic!