What is the Value of a College Education?

While a lot of children grow up thinking that college is the natural successor to graduating high school, it is becoming harder and harder for today’s younger generations to obtain a college degree. Rising tuition costs, fear of student loan debt, and the lack of a family’s ability to chip in towards tuition are all reasons that college seems more out of reach in today’s society. Many students opt for entering the workforce in lieu of attending an educational institution after high school. This leaves many wondering, if you can get a job directly out of high school, what is a college degree really worth?

 

According to Paul Taylor, of the Pew Research Center, “In today’s knowledge-based economy, the only thing more expensive than getting a college education is not getting one”.  Despite the rising tuition costs and the seemingly insurmountable student loan debt, it can be argued that not pursuing a degree will keep a person at an economic disadvantage for most, if not all, of their adult life. A recent Pew Study shows those with a bachelor's degree earn 75% more than those who have a high school diploma. Even with the cost of college tuition and associated fees (room and board, books, etc) the long term financial benefit still strongly leans towards obtaining a college degree. The Brookings Institution provides a calculator that helps determine the value added of going to a specific two-year or four-year college.

 

Still, with cost being one of the most prohibitive factors of attending college, even President Obama is addressing cost factor, while acknowledging the importance of attending college: “At a time when a higher education has never been more important or more expensive, too many students are facing a choice that they should never have to make: Either they say no to college and pay the price for not getting a degree -- and that's a price that lasts a lifetime -- or you do what it takes to go to college, but then you run the risk that you won’t be able to pay it off because you've got so much debt”.

 

In addition to the monetary benefits of obtaining a college degree, those who have a degree and work in a field using their education and training tend to be happier and more fulfilled in their career choices than those who do not have a degree. Additionally, your education will make you a more marketable job candidate over those who chose not to pursue higher education. Although attending and graduating from college takes significant financial planning and saving, the benefits of earning your college diploma significantly outweigh the monetary negatives and will help give you financial security throughout your lifetime.

 

Kent Smetters

Kent Smetters is the Boettner Chair Professor at The Wharton School of the University of Pennsylvania, the Interim Faculty Director of the Penn Wharton Public Policy Initiative, and a Faculty Research Fellow at the NBER. He was the former Deputy Assistant Secretary of the U.S. Department of the Treasury, and he subsequently served as a member of the U.S. Congress’ bipartisan Blue Ribbon Advisory Panel on Dynamic Scoring. Kent holds bachelor degrees in Economics and Computer Science from The Ohio State University as well as an MA and PhD in Economics from Harvard University. He previously cofounded a national registered investment advisory firm that built a new technology platform, grew the firm to over 50 advisors and then sold the firm to a large, publicly-traded company. Growing up in a financially poor family, Kent donates his time to “Your Money” to help families work, save and set goals in order to achieve the most in life. Kent is often cited in major news outlets.

How Much Should I Save for College?

For most parents, the thought of paying for college is scary, especially since many parents are still paying off their own college loans. With the cost of college rising every year, the cost projections of your child’s college education might seem frightening. But getting an early start means splitting up the cost over the 18 years before a child goes to college. The overall cost of higher education won’t seem as daunting.

According to Time.com, the average cost of school in 2014–2015 school year was $31,231 at private colleges and  $9,139 state residents to attend their state college. Tuition doubles for those who attend an out-of-state public college, going to $22,958. With tuition rising on a yearly basis, the following chart shows what college could cost when today’s toddlers are ready to enter:

Projected College Costs Fall 2029- Spring 2030*

Source: Campus Consultants Inc. (Includes room and board)

According to The College Board, tuition increased by 2.9 percent between 2014 and 2015 at public universities, and by 3.7 percent at private colleges. Over the past decade, the average rate was 5 percent. In contrast, according to the Federal Reserve, the general inflation rate was just 2.19% during the last decade.

Luckily, there are ways to help you save for a college education in order to make higher education an attainable goal for your children. Saving $100 a month into a bank account from the time your child is born, will give you a little over $21,000 by his or her 18th birthday. One way to get a more bang for your savings-buck is to invest this money into a 529 plan into a federal college savings program. With a conservative return of 3% per year, you can increase your final balance to almost $29,000 or more. This money will grow tax exempt and there are no penalties or taxes paid when the money is used towards educational expenses. Some states, like New York, also allow to deduct contributions from your state income taxes.

But how much should you save for each child’s college education? There are no easy rules. Mark Kantrowitz, author of Filing the FAFSA and senior vice president of the Edvisors Network, suggests saving up to ⅓ of the total amount. To do that for an infant born this year, you’d need to save about $150 a month for a public college, and $220 a month for a private college. Financial aid and scholarships can potentially cover another ⅓. The last ⅓ of the tuition can be paid using student loans that are paid by your kids, who will have an incentive to work hard in school. But with hard work of your own, budgeting, and foresight, the cost of college should not prevent anyone from attending.

Kent Smetters

Kent Smetters is the Boettner Chair Professor at The Wharton School of the University of Pennsylvania, the Interim Faculty Director of the Penn Wharton Public Policy Initiative, and a Faculty Research Fellow at the NBER. He was the former Deputy Assistant Secretary of the U.S. Department of the Treasury, and he subsequently served as a member of the U.S. Congress’ bipartisan Blue Ribbon Advisory Panel on Dynamic Scoring. Kent holds bachelor degrees in Economics and Computer Science from The Ohio State University as well as an MA and PhD in Economics from Harvard University. He previously cofounded a national registered investment advisory firm that built a new technology platform, grew the firm to over 50 advisors and then sold the firm to a large, publicly-traded company. Growing up in a financially poor family, Kent donates his time to “Your Money” to help families work, save and set goals in order to achieve the most in life. Kent is often cited in major news outlets.