Is college really a good financial choice for everyone regardless of sex or race? I want to know what the data says. I question the College Board’s objectivity and you should too. It’s called “College Board” not “Student Board” and College Board is a big profitable business serving colleges and providing the popular SAT tests. I don’t run a college. I don’t make money from college applicants and attendees. I have no direct financial benefit whether young people attend college or not. But you don’t have to trust my opinion. There’s ample accurate financial information which can shed light on the situation and remove opinions and bias.

To perform a deeper financial analysis I decided to use the same worksheet and formulas used in the College Board report, but apply assumptions that more closely matched what the average student experiences attending a US college. This dramatically changed the results. Additionally, since the report claimed college was highly beneficial to both sexes and all races, but offered no data to back that claim, I applied data from the same source the College Board cited (US Census Report) by sex and race to look at that question closer. Here the results were absolutely shocking.

Before I get to the results I want to comment on the changes I made to the College Board formulas because the results are only as sound as the assumptions. My results differed dramatically from the College Board report. I have outlined in a table (see below) the changes I made with the logic and reason for the alteration. I encourage you to critically examine them to verify the validity of the conclusions I reach.

Using the College Board formulas, the data shows that the financial benefit of college is on average a modest 4% for those attending and completing a public college and under 2% for all graduates of private colleges. These results are arrived at by comparing a 45 year time period with 5 years of college attendance and a 40 year career versus the same 45 year time period for high school graduates.

The data reveals some surprises when looking closely at sex and race. Males experience a slightly superior return for all races except Black in which females edge out males. Asian males receive the highest financial benefit from both public and private college followed by Black females. Overall Hispanics have on average the lowest financial benefit of all races (men and women combined). Most surprising was White females which ranked at the bottom for financial gain at all colleges. At private colleges the average White woman has a negative return indicating that after a 40 year work career they will have less money than their high school counterpart after deducting college expenses and financing costs.

Male

Female

The original College Board report claims a “high yield” for all attendees, but when using realistic assumptions students attending college beginning in 2007-2008 can expect a return on investment (ROI) of 0 to 4.73%. This is not a high yield. It is a low yield. The data suggests that attending a private college is essentially a break even financial prospect after a 40 year career which calls into question the merits of anyone recommending private college to a young person if they are required to take loans to pay for it. Public college (assuming in state tuition rates) sees a slightly better return since tax payers are picking up a portion of the tab. It should be noted that the ROI ranges more than 30% between certain sex and race segments in public college so simply overlooking race and gender would be a misguided strategy.It bears repeating that these calculations are meant to measure the mythical average student. Of course there’s no such student, but this does provide a general indicator of the monetary outcome of a college experience. Many will do better, but many will do worse than the averages listed below. When one includes the substantial 20% drop-out rate and these low average returns it should be clear that college is most definitely not for everyone. For an increasing population - especially those financing their University expenses via debt - college is a financial losing experience. Helpful guidance prior to making the enormous economic investment is warranted. Many choices can greatly reduce the cost of college such as work/study, online courses, AP classes, and community college. Parents, counselors and elders should look to these paths to insure that college is a financially benefit experience for all.

Assumption Changes To College Board Report

–MR

	All Races
	All Races Male
	All Races Male - Asian
	All Races Male - Black
	All Races Male - Hispanic
	All Races Male - White
	All Races Female
	All Races Female - Asian
	All Races Female - Black
	All Races Female - Hispanic
	All Races Female - White
	Earnings By Race & Gender
	Difference In HS PUB vs PVT Education

Dear Ms. Baum,

I am writing in regards to the “Education Pays” report that you co-authored for the College Board. I appreciate the College Board attempting to get information distributed about the financial value of a college education. I think this is necessary and valuable that young people and their parents have accurate and objective information so they can make informed choices about their future. Your report concludes that “[Higher education] yields a high rate of return for students from all racial/ethnic groups, for men and for women, and for those from all family backgrounds.” My belief after analyzing your report is that several critical errors were made in the data used to arrive at that conclusion. These errors and assumptions mean that the report does not represent the true financial picture for the average student.

First you assume that the average student graduates in 4 years when your own data says the average is 6.2. This is a meaningful difference because those extra 2.2 years means higher costs for attendance and more years of lost income. According to your web site tuition costs are $12,796 annually x 6.2 years to graduate = $79,310. The impact is significant because 50% higher attendance fees and another 2 years of lost income would have a dramatic effect on the time to repay the investment. The total impact of this inaccurate assumption is $28,151 in additional education costs and $101,800 in lost income for a total earnings impact of $129,951.

Secondly, for your model you use an artificially low interest rate of 6.8%. This is the rate for federal loans, but the maximum amount that can be borrowed under this program is $23,000. Since only $23,000 may be borrowed under the federal program of the total cost of $79,310 that leaves $56,310 which would have to be financed with private loans that have interest rates of 12-17% which is 200-250% higher. Even if one selects the lower end of that range (12%) then the interest paid goes up by about $30,000 and of course even higher if one models the 17% number.

A critically important data point when performing income prediction model is the expected salary and here I believe you selected an incorrect basis from the US Census data of $50,900 annually and $31,500 for the high school graduate. There are several problems with using this number in their calculation. First your model student graduates in just 4 years which would put them at 22 years old. Yet for the income calculations you use the average salary of a 25 and older. A 22 year old is clearly not going to make the average salary of a 25-65 year old straight out of college. They will typically start at a much smaller salary number than $50,900 and any model needs to account for this. Those monies are especially impactful in the early years when there is huge debt repayments which are required.

In addition, you did not use the US Census numbers for all people 25 years and older, but instead selected just those that registered they were working full-time at the time of census. (I made this same mistake in my own initial analysis.) Assuming 100% employment is unrealistic in today’s fluid economy. It takes time to get a good paying post-graduation job and there will likely be periods of unemployment so the more accurate numbers to use would be all high school grads compared to all college grads. Using these more realistic US Census numbers for all people accounts for unavoidably low or no employment periods. Doing this narrows the earning gap 14% between high school ($26,505) and college grad ($43,143) income levels. And over a 40 year career this is an earnings difference of $310,280 for a graduate earning $43,143 instead of the higher $50,900 number.

According to your chart, the net difference in income after 40 years between a high school and college graduate is under $250,000. If one is to adjust the numbers using the changes listed above (-$470,231) then the financial benefit of a college education goes negative. Thus it would make more financial sense for the average young person to bypass college and simply graduate from high school and enter the workforce.

Absent from your analysis is the cost of attending a private institution. According to your web site private college tuition is about $10,000 per year more than a public school. Over a 6.2 year term this would be $60,000 more in costs which must be financed at a high interest rate.

Finally, your report says that college yields a “high rate of return for students from all racial/ethnic groups, for men and for women.” Yet when I review the same US Census data your report relied upon I see substantially lower annual wages for women and blacks than used in your analysis. Women earn just $36,532 versus the $50,900 in your report. Hispanic women earn even less at $34,302. Black women earn $41,298 and black males earn $41,871. Over a 40 year career those earning differences can be over $500,000 which is a dramatic difference. I see no data in your report for the claim that college produces a high rate of return for women or blacks which have much lower expected salaries.

Since you did not publish the actual formula or make available the spreadsheet, it is impossible for me to precisely calculate how these issues affect the underlying financial analysis. Perhaps there are other factors which I’m unaware of. However, I believe the issues I laid out more accurately represent the financial experience of the average college student rather than the super student who graduates in 4 years, never spends time looking for a job, is never unemployed, and immediately garners a job making the average of their superiors.

I’m sure the College Board strives to get accurate information out to the public about college. I share in that goal. I would kindly request that you evaluate the points I am bringing to your attention and respond to my inquiry with a reasoned explanation. Getting the most accurate information to the world is extremely valuable when young people every day are being asked to make life changing financial decisions about attending college.

– MR

The analysis begins by assessing a college education purely as a monetary investment. Undoubtedly, there are other benefits beyond money to attend college, but it’s such an enormous economic decision that it seems foolish to not fully understand the financial ramifications and use that as a primary factor in the decision process. Overall, college grads do have higher earnings than non-grads, but that’s only part of the equation. A deeper analysis looks at the costs of acquiring that degree and the monies including interest charges which need to be repaid. (At the end of this piece is a complete listing of the data sources used and a walk through of the calculations.) Using a 40 year time career, here is the total return which look at earnings, college expenses and interest.

These numbers indicate that a college education is an extremely poor economic investment for private universities and while better for public institutions still poses a meager return when compared to typical investments. To put this another way, most financial planners expect a 7-8% annual return. If you proposed to them a 40 year investment with expected yields of 2-4% on average they would most surely recommend against it. Making matters worse the numbers used for this calculation use average salaries for men. Since average women salaries are less college is even a poorer investment for females.

You may walk through of all calculations and a link to the spreadsheet file, but we want to anticipate some of the criticism likely to be pointed out. First, in our calculation we assumed 100% debt financing. Few students finance 100% of their academic costs. Some have parents that pay all or a portion of the costs. Some qualify for financial aid such as grants. But just because the monies are coming from another source doesn’t change the effective return. It just distributes the poor investment to a wider pool of people (taxpayers and parents). Let us examine what the numbers look like if you’re lucky enough to have your parents pick up the whole tab, but instead of using the monies to go to college, you invested them in a balanced portfolio which returned 7.5% annually and got a job straight out of high school. For this example we use public University fees ($76,776). Private school would have even a greater disparity.

What these numbers indicate is that trust fund babies (or anyone who has parents paying the college tab) would be better off taking their college funds and investing them, bypassing college entirely and working at whatever job they could get without a degree.

There are a few important conclusions to draw from these numbers. Conventional wisdom tells parents they should be pushing their kids to college. For many young people this may be awful advice dooming them to a mountain of debt they will struggle with for decades if not the rest of their life. Exploding costs of higher education tuition (up 35% in the last five years and double digit growth for more than a decade) have far outpaced income growth making a college education a poor choice for half or more of the population.

Private colleges dramatically cut in half the expected return taking it from 4% to 2%. Public Universities are a better financial choice. It is unlikely government schools are run more efficiently, but rather they receive substantial sums of state and federal tax money defraying the cost to the student. In effect, taxpayers are shouldering some of the costs reducing the expense to the attendee.

This doesn’t mean college is a bad choice for everyone. The income numbers used were based on median salaries from US Census data. This means that half of the people in the U.S. will do better, but half will also do worse. The problem is that every student will likely think they’ll do better than the average. This is the same mentality people go to Las Vegas with and feed the slot machines hoping to win. Deep down they know the numbers are against them, but their emotions override any rational thought and decision making process. Unfortunately we are not talking about a few hundred dollars of blackjack, but tens of thousands of dollars.

At 18, many are ill-equipped to make a rational decision about whether to take on $70,000 of debt pursuing a degree (fortunately college was a tiny fraction of that two decades ago making it a significantly better investment). Universities are increasingly like casinos selling hope with no mention of the underlying economic realities. They receive payment up front and if students depart and struggle to get a high paying job, the university sees no financial repercussions. There are few classes emphasizing learning a specific skill to increase earnings out of college. There are no mentions to avoid majors like art history, medieval literature, philosophy or other degrees with low earning potential. There’s little interest in producing graduates with specific skills in high demand since there’s no direct financial ramifications. (There are some exceptions like UCSD working with Qualcomm to produce wireless engineers, but this affects very few students.)

Student loan companies make it remarkably easy to secure tens of thousands in debt with just a signature. Most concerning is that student loans are not eligible for bankruptcy relief. Make a bad decision starting a business, buying a car, financing a house and you can seek bankruptcy protection. No such opportunity exists for student loans. This financial decision lives with you forever. Once saddled with large debt job choices, housing choices and even marital options can be greatly impacted. It’s nearly impossible to save for a down payment on a house. Jobs have to be evaluated based purely on base salary terms. Prospective spouses may hesitate to get married fearing they will take on the repayment obligations torpedoing their own credit.

Young people have limited capacity to understand the long term implications of their decision, yet it is not in the economic interest of universities or loan companies to disclose these stark realities. Every university and loan company has growth plans achievable only by increased enrollment. This means more kids than ever will be enticed to attend college by hearing all the positives. But today it’s a poor economic decision for half the students. There is no data to suggest wages are likely to increase significantly or that college expenses will drop from today’s levels, which means we’ll see continued deterioration making it a poor choice for even more than half of those attending college.

Few young people will be able to independently assess the value in advance and counter the societal and parental pressures which push them to attend college at any price. It’s imperative those with influence over young people make an unemotional analysis prior to college and point them to an appropriate path. For top students this means selecting public schools instead of private. Mediocre students should take advantage of lower cost options like Junior colleges to reduce costs and insure they are benefiting from advanced education. Both should be sensitized to the importance of selecting a high income major to increase the likelihood of a positive outcome. Half the students should be discouraged from attending college and pointed to a vocational career path. The expensive traditional 4 year liberal arts education approach is now failing the majority from an economic perspective. New approaches with a greater emphasis on direct vocational skills are required. Quick realization of the economics of college education is imperative to avoid dooming half a generation of young people to inescapable, life limiting debt.

Copyright 2006: REEF (www.aboutREEF.org)
Authors: Michael Robertson, Tina Donaldson

Redistribution of this article is encouraged. If written authorization is required, contact Tina Donaldson at 858-784-0165 ext. 100

Lifetime Median Earning	Annual Salary	40 Year Total
College graduate	$51,110	$1,788,885
High school graduate	$29,337	$1,202,791
Difference	$21,773	$586,094

The constructed career model assumed at high school graduate starting salary of $19,994 with 1.8% annual income growth. College graduate starting salary was calculated at $34,145 with an 2.25% annual income growth. The total lifetime income for both high school and college students were in line with US Census data.

College costs and average years to achieving a degree were calculated using College Board School Pricing 2006. (Rounded down to the nearest full year.)

Federal student loans have a legislated 6.8% interest rate with a maximum amount of $23,000. Private loans range from 12-17%. For this analysis a 12% interest rate was used for all private loans.

Earnings Over Lifetime

Earnings Over Lifetime