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Mass Affluent: College is Worth the Investment

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You can be financially successful without a college degree. One summer when I was younger, fresh out of college, I worked for a touring drum and bugle corps. It’s a group of 128 adolescents and young adults and 40 staff who drive around the company in buses, performing almost every night for seven weeks, marching on football fields for dwindling audiences. The caravan included several charter buses, a few vans, and several eighteen-wheel trucks.

A conversation I had with one of the truck drivers always sticks in my head. “Why go to college,” he asked, “when you can make a great living on the $50,000 you earn from driving a truck?” I didn’t know whether he was referring to an average salary in the industry, a starting salary, a mean salary for all truck drivers, or what a driver would earn at the top of his career. Regardless, $50,000 sounded better than the starting salary for teachers in the state where I was living, and was almost twice as much as I would earn from my first job, in non-profit, at the end of that summer.

It’s not that I was considering becoming a professional truck driver. I certainly respect those who do that work, but I didn’t feel it was right for me. And I never questioned the value of a college education in itself, but with my first payments for student loans after in-school deferment coming due that summer and my first attempts as an adult dealing with finances leaning towards ignorance, it made sense to me how one might not see the value in an education that costs as much as mine did.

Later, I learned more about the concept of return on investment, and the idea that college might not be worthwhile bothered me even more. Reading and writing about personal finance, more and more I was surrounded by the opinion that everything could be measured by money. Something is worthwhile only if you can gain financially as a result of an expense. A degree is worthwhile only if the income you can earn over and above the income you might have earned without the degree. And in many situations, this plays out, making the college degree worthwhile — for just about everyone, ironically, except for education majors, as I’ve mentioned recently.

Bank of America’s semi-annual Merrill Edge survey was just released, and the results focus on what the group calls the “mass affluent” — those with $50,000 to $250,000 in investable assets. Investable assets for the purposes of the report include “cash, savings, mutual funds, CDs, IRAs, stock, bonds and all other types of investments excluding primary home and other real estate investments.” Not included are the wealthy and households without savings, so this report might reflect the opinions of what we might consider to be upper-middle class.

Understanding the mass affluent approach to college education is one of the goals of the survey. Parents with young children are more likely to see a college education as a worthwhile investment. In families without children, however, almost half of the respondents believe either that college is not worthwhile or don’t know.

Half of all respondents wish they had begun saving for their children’s education earlier; while 45 percent answered no to the same question.

The mass affluent — again, those with investable assets between $50,000 and $250,000 — intend to use their own savings to fund at least part of their children’s education. 58 percent respondents indicated personal savings would be a source of funding. 36 percent of respondents indicate they expect scholarships and grants to cover some of the tuition costs, and that’s the second most popular category of funding after personal savings.

9 percent indicate they intend to use a home equity loan to pay for their kids’ college costs, while 4 percent have no plan at all.

Respondents were asked, “Do you think the cost of college education is worth the return on your investment?” That is the question that was answered “yes” by 75 percent of parents with young children. The question is worded in such a way that it gets the respondents thinking about the financial return. That is, the primary instinct when considering the answer is to consider the financial cost and the likely earnings once the kids receive the degree, across all majors and career paths or across those most familiar to the parents.

Had the question been worded differently, the answers might have been significantly different. What is the difference between an expense and an investment? Sometimes it’s only in the terminology. Why buy a new car when you can invest in your image and your future career path? Either way, you’re taking $30,000 or more out of your pocket for a fancy ride, but the language you use affects how you feel about it. When you think of college as an investment rather than an expense, you begin expecting a financial return — which is possible. You don’t “invest” in a Disney vacation, though both a vacation and an education can often be more about the experience than what you might receive in return.

If the question had been worded, “Do you think the cost of college education is worth the expense?” there might have been a more positive response. At the same time, if the respondents had been asked, “Do you think the cost of college education is worth the investment, considering the cost of debt, the cost of a delay in earning an income, and the cost of the uncertainty of employment?” the answers may have been less favorable. Even a simple, “Do you think the cost of college education is worthwhile?” might have produced different results in the survey.

In the financial industry, it’s the job of writers an analysts to look at everything from a financial perspective. In life, money is just one, albeit important, aspect of measuring the value of something. Financially-minded people want a return on investment for everything they do. Enjoyment and enlightenment are not easily measured by a bank account balance, and are often ignored in the value equation. It’s important to think about the financial considerations of major expenses (or investments) like education, but how much money is in your pocket is not the only measure of value.

Merrill Edge [pdf]

Published or updated October 24, 2012.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 9 comments… read them below or add one }

avatar 1 Anonymous

College is much different than a trade school.

If your are measuring return on investment based upon earnings post graduation alone, then the investment does not work well for most people. A school that teaches specific job skills would have a far better return.

College teaches broader skills. I have forgotten most of the material covered, but the critical thinking skills, work habits, and personal connections are far more valuable. They are also more difficult to quantify.

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avatar 2 Anonymous

I think part of the confusion lies in vast variety of college experiences. On one end of the spectrum you can pay $5500/semester for 8 semesters ($44,000 total) to get an engineering degree from your flagship state school and earn $75k starting out of school. On the other end of the spectrum you could go to Sarah Lawrence College at $22,000 per semester for 10 semesters $220,000 total) and eventually emerge with a degree in art history that qualifies you to make coffee at Starbucks.

These two people are not going to have the same outcomes in terms of debt and the value of college.

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avatar 3 Anonymous

When I was drafted (1968) into the army, I remember a truck driver (19 y.o.) was earning $11,000 a year. I just graduated college about 6 month before and earning $7,500 per year. It really bothered me! The saving grace was I would not be driving a truck when I was 40/50/60 years old. College prepares you for more than your first job.

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avatar 4 Anonymous

There might be some selection bias here. The wealthier people are more likely to have seen success due to college and therefore more likely to think its a good deal. If college doesn’t pay off well for you then you’re less likely to be wealthy. If college did pay off for you then your more likely to be wealthy. So asking wealthy people of college pays off will get skewed results.

The differences in opinion between married with/without children may reflect age related differences as the value of college has changed over time. Parents of adult children are more in their 50-60’s and when they were growing up a college education wasn’t as mandatory for success but parents of small children are in their 30s-40’s and for that generation college is viewed as more of a mandatory requirement for financial success.

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avatar 5 Anonymous

I agree with Jim here, the sample audience might have a bit of a bias. But I also agree that the way a question is worded can significantly vary the results. Personally, my college education, though i hate to admit it, has provided me with the opportunities to get me where I’m at today. I hate to admit it because I paid $33k for an Art degree in audio production, which I will NEVER advise anyone else to do, but it luckily worked out for me.

Also, what drum core did you play in? I was thinking of going out for the Cascades (I’m in the northwest), but never did.

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avatar 6 Anonymous

You state “A degree is worthwhile only if the income you can earn over and above the income you might have earned without the degree.”

You forgot an important part. That part is “Plus return on the expense and opportunity cost of obtaining the degree”

National stats show that on average a 4 year degree is worth about $2.3M in lifetime earnings vs $1.3M for a HS diploma only. So conventional wisdom holds that a degree is worth $1M more. No brainer, right.

Except you have to factor in the average $50K cost of obtaining that 4 year degree as well as the opportunity cost of not earning a full time income for those 4 years while in school.

Someone who didn’t spend $50K for college, has the ability to invest it. Plus a portion of their earnings over those 4 years. If you assume a smart young person invests $50K (whether form money designated for college or by saving $12,500 per year of working full time and living at home), that $50K at 10% growth over 40 years turns into $2.8M.

All of a sudden that degree doens’t look so good now. Smart young person has no debt, has more experience at an earlier age, and throughout life has a much larger net worth than their degreed counterpart on average (except for professional degrees – JD, MD, etc)

An I am not pointing this out out of envy or justification. I have an BS & MBA and plenty of education. I would trade it for 50K (mine was closer to 75K) invested 20 years ago, though.

I would recommend that if my kids did not want to go into a profession degreed occupation, that they live at home for 4 years, work a job (or start their own business), save half of what they make, and invest the cost of college in the market. No debt, a head start, and by age 30 they will have surpassed 99% of their peers in net worth and the degree wouldn’t matter anyway.

By age 40, they would most certainly be millionaires with little effort.

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avatar 7 Luke Landes

You’re right to look at opportunity cost. But most of that opportunity — not just in the hypothetical “what would I do with tuition money if I hadn’t attended college” but in many other circumstances where financial minds like to use opportunity cost — goes unused. The lost opportunity is investing tuition money rather than spending it on college, but the chances of would-be students actually investing tuition money is pretty low. The money would probably be used for purposes other than investing in the stock market, so instead of returning that hypothetical 6% used in opportunity cost calculations, the return is worse. Additionally, if the costs of college are financed, there is no or little cash to put to use, anyway. There’s the savings of not needing to pay interest…

So in order for opportunity cost to matter on an individual level, the individual has to behave in an optimal pattern of investing — and the stock market or other investment has to perform as expected. Opportunity cost is a good measurement on paper, but reality often makes the results different.

And again — this is only the financial aspect of determining whether a degree is worthwhile. There’s more to a college education than the possibility for a higher salary and a higher lifetime income, whether you factor in opportunity cost or not. Of course, if someone didn’t actually get anything out of college from a cognitive perspective or from a human capital perspective, then they would have been better off investing their tuition money or avoiding the debt.

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avatar 8 Anonymous

After graduating with my bachelor’s degree in chemistry six years ago, most of my my friends with no degree have and will continue to out earn me. My work may not expose me to nature as much but I as a chemist I am exposed to the elements.

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avatar 9 Ceecee

Back when I went to college it was not as expensive and it seemed worth it. It did help me get jobs and I also made friends for life. Did I earn more??? I’m not sure about that but I still wouldn’t change things. These days, things seem different. A college education is so expensive. It only seems worthwhile if you emerge as an engineer or a doctor……or with a path to a profession where the compensation is very high. If I had to do it all over today, I would probably earn a degree over a much longer period of time while also working.

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