This is a guest article by Investor Junkie, a blogger who writes about investing and being an entrepreneur.
In the past 10 years we’ve had many financial bubbles. First it was the tech bubble, and then it was the housing bubble. But do we have a higher education bubble? Having a web site named Investor Junkie I’m obviously into investments. With proper planning, I believe a higher education can be a profitable investment.
With the amount it costs for an education today, it’s important to consider the return on your investment. It’s an important investment of your time and money that if done carefully, can reap years of rewards. The CollegeBoard has some interesting statistics about the average cost of a college education for this year. According to their stats, these are the average yearly costs.
Private: $26,273 (up 4.4% from last year)
Public: $7,020 (up 6.5% from last year)
This doesn’t even include food, board, and book fees. In comparison to these increases, the average annual inflation rate was only -0.34% last year. (See later in the article how this rate might be questioned.) FinAid makes this depressing statement on their web site:
A good rule of thumb is that tuition rates will increase at about twice the general inflation rate. During any 17-year period from 1958 to 2001, the average annual tuition inflation rate was between 6% and 9%, ranging from 1.2 times general inflation to 2.1 times general inflation.
How can they justify the increases that over the past 10 years doubling inflation? If I earned the same investment returns colleges had with their tuition fee increases, I would have made out like a bandit.
Paying for college
How can someone save for college when the increase of college costs are beating most investments? Assume the average rate of the stock market is 8%. When starting with zero savings, this means you are almost ensured your goal will not be met.
I currently have two children with a third on the way. We are saving for our children’s education, but with the rate of increases it will be impossible to completely pay for our children’s education through saving alone. Just to keep up with the increase in costs, you need fund the total amount today ($105,092 for private schooling) so you are prepared in the future. This also assumes your investment matches the typical stock returns; if not, look out!
If your child isn’t first draft in college football picks, what are you other options? The CollegeBoard has an answer for this (emphasis is by me):
There is more than $168 billion in financial aid available. And, despite all of these college price increases, a college education remains an affordable choice for most families.
So if your family can’t afford it, don’t worry. There is massive amounts of money still available. What exactly is “affordable” if you have a college payment that equals a home mortgage in some parts of the country? The key part of this equation is for those who qualify for scholarships. For most, the logical conclusion is to get a college loan to pay for some or all of it. Debt is debt, no matter if it’s for consumer items, a house or an investment. Eventually it needs to be repaid. The worst part of college debt is it hangs around you forever. No bankruptcy will eliminate it. It doesn’t take a PhD degree to determine that $100,000 (at least in today’s value) will take years to recoup in salary.
If a recent graduate is able to get a job, according a BusinessWeek, they made on average $49,307 in 2009. In December 2009, the Wall Street Journal reported the rate of unemployment for recent college graduates was 10.6%, similar to the national level. Once a graduate gets a job and has other living expenses, how quickly will they be able to pay it off?
An education is an investment in your future, with the hope your salary increases because of the higher education. With any investment the goal is to achieve gains you wouldn’t have if you didn’t invest. The question is at what point does the amount of money required for a college education becomes not worth it? When does the ROI (return on investment) outweigh other investment choices? If you look at it from purely an investment standpoint and not for “enlightenment,” your choice of major and school might be different. The end goal should be getting the best bang for you buck.
What’s the cause?
Why is the cost of a college education rising as such a rapid rate? I only come to two valid conclusions. One option to consider, is the inflation rate is not an accurate representation. This could also explain increases health care and commodities. Maybe statistics like ShadowStats are discussing in fact showing the true inflation rate and better explain the reason education costs are increasing at the current pace.
The other conclusion is government intervention into the education system is causing the increases in pricing, whether through loan guarantees or loan offers direct to students. The government putting out more money to the public than what normally would be available makes more dollars chase after too few resources.
Regardless of the root cause, the cost increases are not sustainable. Students and parents can make other choices, such as attending a two-year college, attending a trade school, purchasing a business franchise, investing in a new business, or (in my opinion the worst option) not going to college at all. As many recent graduates have found out, a college education does not guarantee a job.
These recent graduates have the most amount of amount of debt compared to any previous generation. Today’s college education is equivalent to yesterday’s high school graduation, except with massive debt. That’s not a great situation to be in when just starting your career and life.
Updated June 22, 2016 and originally published March 30, 2010.