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?
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As the parent of two college grads (one of whom is now in law school) and a college junior I think every penny we spent on their educations is worth it. It is an investment in their futures. That said our oldest received a full tuition ride to an expensive private university (academics) and our second one received a very substantial financial package from another elite private university. Our son is at an in-state public university. Our oldest was an art major and works as a web designer/publisher, our middle one majored in religion and anthropology and even if she hadn’t decided on law school I’m pretty convinced that she would have been able to find a decent entry level job on the strength of her contacts and the network of her school. Our son is getting great work experience in the athletic department of his university and he will do well. I realize that the job market is tough, but some of this is on the kids. To a certain extent you make your own luck in this world and I have to wonder if some of these college grad having the problems you read about have done a good job of networking and all of things you need to do to be successful.
Thanks for the detailed comment Roger. I think you were very fortunate to have two of three tuitions nearly paid for and the third in state though. Most people are not so fortunate. Do you think your oldest’s education would have been as valuable if they had to take out loans to pay for the whole thing?
As for the networking part, I completely agree. I got my first job from a contact I made at a family party. There’s no way I would have gotten the job without that contact and it’s not that my resume stood out or anything. It was solely because this guy recommended me.
http://www.usnews.com/education/blogs/the-college-solution/2011/03/01/the-ivy-league-earnings-myth
College is an investment i professional and personal development. The relative worth is dependent on the individual. Unlike other investments, it is what you can do with the training and education that matters. I worked for a president who majored in English and he went into marketing. A college degree just prepares you for a professional career, it does not guarantee anything.
That’s true but I guess like you say it depends on the person. I think it’s trending in the wrong direction which is why I think it should be treated as more of an investment and less a right of passage.
Whether college is a good investment depends on the career. Engineers, physicians, biochemists, and such all need the extensive training that they get in college. For them, college is a necessary expense and is typically a good investment. Even most of these college-necessary careers, though, do not need to pay the high costs to attend private schools to earn a high salary. That depends more on the person’s motivation, technical expertise and capabilities, networking skills, and desire to get ahead.
Yea I tend to agree, there’s really no degree that requires going to a costly private school to earn a high salary like you say. I think it definitely depends on the person and how motivated they are. Once you have a few years experience under your belt, where you went to college doesn’t mean anything. It’s all about how you perform.
I work with a number of young people who are trying to manage through the massive amount of college debt they have accumulated and it is always sad to see the “regret” they have for the “investment” they made. The fact is that there are no guarantees that the investment you make in college will provide you with a definitive return as it used to. I agree with you that parents need to stand step up and one of the best ways they can do that is by counseling their children on not overextending themselves with student loan debt. If the parents cannot afford to assist the students, then they need to prevent them from going to costly private schools when many public universities are just fine. In fact, if you plan to live in the state of your school, you will probably have a better chance of getting hired as there are more alums from your university floating around and willing to hire.
Yea unfortunately too many kids think they deserve the right to go to any college and their parents are not doing them any favors by obliging their decision. I think there are still some guarantees – any major in computer science or engineering, bio-tech, stuff like that is in high demand but not everyone is in it for the money(I am!)
College was an investment for, but then again I chose my college based on their competitive offer. I treated college as a job. Whoever paid me the most got me.
My brother is going to go to college. No question about it because I agree it’s the best chance for him to get a better life. But I won’t let him get into loads of debt. He can start a community college where it’s cheaper and transfer to an in-state university, unless he gets awesome scholarships.
I like that mentality and your plan for your brother. Freshman year on campus is a lot of fun but not worth all the debt IMO. Definitely a good idea to load up on community college courses and then go to a 4 year. Or even supplement your college courses with community college classes that will transfer that way you might be able to graduate in 3 years instead of 4 and save some money.
Yea I think that mentality is definitely getting a lot of students into some trouble. And you’re totally right, once you get a job and work for a few years your degree doesn’t mean anything if you suck at your job haha.