Dad Should I Go To College and Will You Pay For It?

Dad Should I Go To College and Will You Pay For It?

The answer depends on the intention.  If it is the intent to (a) avoid going to work i.e. extended day-care or (b) defer entry into the real world of self-dependence (assuming you can get someone else to pay the costs or you will finance the costs with debt that you neither intend or are able to discharge) then ABSOLUTELY, ENJOY!  On the other hand if the intent is to make a rational decision based on lifetime economics and return on investment, lets take a closer look.

When I asked myself this question in 1965 (it was clear that college was an option only if I paid for it) I answered –yes.  But I did not, I am sorry to say do an analysis of the net present value of the education.  So here is my retroactive analysis;

Cost of Education = Out-Of-Pocket Cost of Education (tuition, books, fees etc., net of scholarships, and fellowships) + loss of earnings while continuing education (measured by probable earnings as a high school graduate) – part-time earnings during education = the

Value of Education = actual earnings as a college (and law school) graduate –             probable earnings as a high school graduate – Cost of Education

To refine the calculation we might look at the full cost of education, not just the portion paid by me, which we can measure by making the assumption that the state-public school system I attended had a cost not greater than the equivalent private schools offering a similar education in the same geographic location.  The of course reducing all cost to comparable dollars through a present value calculation.

When I do this analysis for myself going to college and on to grad-school was a very clear winner.  But this was as of 1965which is interesting but not instructive for those looking to make the decision today.  The same analysis performed for my daughters (using average costs and earnings) and starting in 1990 is a closer question but still yields a very positive result.  Again, this is interesting but not instructive.

The factor absent from these calculations is one that did not exist in 1965 or 1990.  In the job markets that existed at those times there were plenty of opportunities for employment without a college education, albeit at lower compensation, slower advancement opportunities and levels.  In 2013 the job market is noticeably and remarkably different in at lease the following particulars;

  1. The top-line unemployment rate has gone from the 4-6% range to 7-10%, and that is despite the facts that both the labor force participation rate (63.3%) and the ratio of those employed to the total population (56.8%) have fallen to new lows!
  2. Recent college graduates, predominantly falling in the 20 to 29 year old age category have seen overall employment, for their age group, fall in just the last 5 years by in excess of 1.1 million jobs! (In fact there are more than a million fewer people in the 16 to 25 year old category employed today than in 2007!)
  3. Although there are approximately the same number of high school drop-outs and those with only a high school diploma in 2013 (over age 25) employed, as there were in 1990 there are more than 27 million more people employed with at least some college than in 1990!

This leads to the conclusion that college now serves, at least, as a gate-keeper or threshold to employment, whether or not it enhances the net lifetime present value of earnings.   On the other hand it may just be that there are more college graduates available in the labor market, irrespective of learned skills, and employers have concluded that they might just as well hire someone who at least has shown some interest in learning skills, by attending college, whether or not those skills are applicable in the work place.

However, this information should also be included in our formulaic calculus, as suggested above.  And for this I would suggest that the resultant Value of Education be adjusted by weighting the result by the increased likely-hood of finding employment over an individuals lifetime, in other words by the inverse of the differential between those who are employed with and without college attendance.

As an example of the calculus as of 2010:

Assumptions;

  1. Annual wage of an employee without any college in 2012 $22,000 at high school graduation
  2. Annual wage of an employee with some college in 2012 $40,000 at college graduation
  3. Increasing rate and ceiling on earnings for attending college over not attending 50% (premium on earnings acceleration 50%)
  4. Out of pocket cost of state undergraduate college education (tuition, fees, books, living expenses) per year $14,000
  5. Same as 3 for non-residents $36,000 thus representative of the full cost of education
  6. Living expenses during college $18,000
  7. Age of graduation and workforce entry 24
  8. Length of work force participation 41 years (to age 65)
  9. Cost of money 6%

10. Average number of years to graduate college 5

11. Adjustment factor for a lifetime of better employment opportunities 115%

Results;

  1. Out of pocket cost of education – 5 X ($22,000+$14,000+$18,000)=$270,000
  2. Societal cost of education– 5 X ($36,000-14,000)=$60,000
  3. Total cost of education $330,000
  4. Differential in life time earnings (nominal) 41 X $18,000=$738,000 X 150% (for accelerating earnings potential) = $1,107,000 X 115%
  5. Present Value of differential of life time earnings at 6% $479,000 approx
  6. Differential between 3 and 5 $249,000

Now having said this if your money is worth less than 6% the differential increases.  Similarly reducing the number of years of college, the cost of college or increasing the differential in earning over time, for the college graduate.  Of course in each case the reciprocal is also true.  Bottom line, college is THE BEST CASH INVESTMENT a parent can make in a child, provided ONLY THAT the child is willing to invest their energy in their own future!

 

 

 

 

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