When we think of investments, stocks and bonds are usually the first things that come to mind. But what about investments in human capital?
Human capital usually refers to the knowledge or information you've acquired over a certain period of time. Most people do most of their investing in human capital early on in life: going to school, learning a new skill, or starting a new job.
Once you start working though, your investment in human capital will likely start to decline. Some people may go back to school or try to learn new things at their job, but ultimately you do most of your learning when you're young.
Right now, we're in the midst of a massive student loan debt bubble. It's only a matter of time before it comes crashing down since there's no way that tuition can continue to increase at 3x the pace of inflation and remain affordable for everyone. Since tuition can be paid for with government loans, there's no incentive to worry about the cost until it's too late. You can't expect 17- to 18-year-old kids to make smart decisions with tens of thousands of dollars. In fact, you probably can't trust most adults with that kind of money.
College is an Investment
I think one of the big reasons why college tuition is increasing so rapidly and forcing students into more and more debt is because college is not being treated like an investment. Think about it like this, would you invest in a stock without thinking about how much it costs? Well, that's what a lot of people are doing these days. College-bound students and their families are picking colleges without any regard for the future.
I have a friend who went to a private school and majored in history. Big surprise, he's $100,000 in debt and has no job. He'll most likely end up going to grad school since that's the only way to defer his loans. He could have gone to a local state school and been $25,000 in debt, graduated with the same degree, and also not been able to get a job, but he didn't.
If I was an investor and someone came to me asking for a $100,000 loan to major in history at a mid-level private school I would say, “Absolutely not!” There's no way that student would be able to pay back that amount of money with an undergraduate degree, but that's what our government is doing. They've essentially eliminated the most fundamental part about giving out loans: underwriting. Just look at our Definitive Guide to Student Loan Debt.
A College Degree isn't Worth What it Used to Be
I don't think it's fair to blame the students taking on the loans since they're probably not even legal adults when they decide upon a certain college. But in today's society, there's more pressure than ever to not only get into college, but also get in to one of the best schools.
There's an abundance of colleges just waiting to take your money and a lot of them won't provide much in the way of education. Going to college actually meant something 20 to 30 years ago, but now you can't get hired as a law clerk without a college degree and a decent GPA.
Time for Parents to Step Up
One solution would be for the government to force every college to publish a list of the average debt of each graduating student and the expected salary and likelihood of getting a job by major. If you saw that art history majors averaged $60,000 in debt and had a 25% chance of getting a job that paid an average of $30,000 per year, you might rethink your choice of major and/or school. I don't think anything like this will happen too soon since it makes too much sense so it's time for the parents to start treating college like an investment.
In investing, we always say that past returns are no guarantee of future performance. That saying applies perfectly here since obtaining a college degree doesn't guarantee you anything anymore. You need to make sure that you pick a major with decent job prospects and that the average salary when you graduate will be enough to pay off your potential debt.
College used to be a “good investment” because it meant that you had set yourself apart from peers. But these days, it's easy for a below-average student to get into a college, coast through and graduate having never boosted their human capital. With a saturated job market of college graduates, students and parents should start thinking more along the lines of how they can make a smart investment instead of picking a school because of the mascot or because they have an awesome football team.
Readers, what do you think about college as an investment? Should it be treated more like an investment or should students be able to pursue their passions without regard for the future?