Education Isn't the Slam Dunk Investment It Used to Be
At a time when a college education couldn't be more important to U.S. workers, the return on investment for college is becoming frighteningly low. I'm reminded of this cost every month when I see nearly six figures of student loan debt staring me in the face, and for my younger family members, it looks like the numbers are only getting worse.
It hasn't always been this way. From a strict investment standpoint, going to college used to be a no-brainer. Cost was a factor, but state schools offered an affordable way to get a four-year degree and attain the higher salaries that come with it. But over the last 30 years, the cost of college has become prohibitive to many students coming out of high school. For those whose families can't afford to help, the potential hole they can dig has grown cavernous.
The Institute of Education Sciences says that the cost to attend a four-year public school rose 135.3% between 1980 and 2009, after adjusting for inflation. Figures are similar for private schools, as I've shown below. The payback over the same time period has gone down.
Annual Cost of a 4-Year Public Institution
Annual Cost of a 4-Year Private Institution
Source: National Center for Education Statistics.
Media reports often throw around these kinds of figures to show how someone with a bachelor's degree can earn a million more dollars than someone with a high school degree over his or her lifetime. But they rarely talk about college like it is: a financial investment in your future, with both returns and opportunity costs. So I decided to do the math and figure out what the return on an education really is -- and how far it's fallen.
A little Foolish math
Using Institute of Education Sciences data, I've done an investment comparison below. I built a model that began with four years of college, with costs increasing 10% each year. I've assumed that upon graduation, students will earn the average salary cited by the National Center for Education Statistics, with a 3% increase in wages each year. This may underestimate wages at the end of a career, but it overestimates wages at the front end, so I think this is a conservative approximation. Based on this model, I've calculated the return on investment of an education for men and women in the time periods below. As you can see, the ROI for an education has gone down dramatically in the last decade, after actually increasing from 1995 to 2000.
4-Year Public Institution Undergraduate Degree Cost Per Year
Median Annual Earning -- Men
Median Annual Earning -- Women
|1995||$9,442||$49,300||$39,400||Men: 30% Women: 28%|
|2000||$10,609||$56,100||$43,600||Men: 32% Women: 30%|
|2005||$13,062||$49,400||$41,700||Men: 25% Women: 24%|
|2009||$14,870||$51,000||$40,100||Men: 24% Women: 21%|
Source: National Center for Education Statistics.
Note: Figures are adjusted for inflation. 1995 tuition costs are extrapolated from 1990 and 2000 data.
It's interesting that one of the only reasons the ROI remains this high is because the expected salary for someone with a high school diploma or equivalent has fallen substantially, with a drop of 25% since 1980. Without that drop, the ROI in 2009 would be 12% for men and 17% for women. The drop in high school diploma-level salaries has been 9% in the last decade alone.
What's even more disturbing is when you use the numbers above and calculate the present value of a four-year degree and an ensuing 30-year career, versus working for four years during college. This sort of net-present-value calculation would be one of the first things a finance analyst would do when analyzing an investment opportunity.
I assumed a 10% ROI would be required for making such a sacrifice. My calculations produced a net present value of $122,413 for going to college. A high school graduate's present value of working for those first four years is $111,366, or $11,047 less. In other words, if you required a 10% return on your college investment, it's worth it -- but not by much.
This doesn't tell the whole story
As with any model, the results are only as good as the inputs. These numbers would change using a different discount rate, assuming a higher-paying job, a lower-cost school, or any number of variables. There are also less tangible things like work ethic, network connections, unemployment rates, standard of living, and a host of other factors that are difficult to include in such a model, so the numbers aren't perfect.
What is clear from these numbers is that the return on an education is dramatically lower than it was 10, 20, and especially 30 years ago. It's even gotten so low that I don't blame anyone who questions whether the cost is worth it.
What this all means
This means a couple of things for investors and the country. For American companies, it means that their shortage of highly educated workers may not be improving any time soon. Apple (NAS: AAPL) and Caterpillar (NYS: CAT) have complained about a lack of qualified workers as one of the reasons they haven't hired even more workers in America. These two companies are two of the biggest hirers, and if they can't find enough workers with the skills they need, the problem is pretty widespread -- and it could eventually hurt their financial results.
It also means that creating innovative ways to get an education could pay off. Corinthian Colleges (NAS: COCO) , DeVry (NYS: DV) , and Apollo Group's (NAS: APOL) University of Phoenix all have an opportunity to fill the gap traditional schools are leaving. But the problem is that their online programs aren't always cheaper than their brick-and-mortar alternatives. For instance, when I ran numbers for the University of Phoenix, I came up with annual costs of $14,440 for a finance program, while DeVry's accounting bachelor's program had costs that totaled almost $72,000. That doesn't materially change the cost equation from traditional colleges. If these companies can't find a way to build a low-cost alternative, who can?
Finally, the falling ROI on education means that parents and even students are going to need to save earlier to pay for college, because borrowing enough money to pay for school can bog a person down for a decade or more. For a few ideas on where to start, check out our free report outlining nine stocks that can help secure your future.
The million-dollar question
So what should we do to fix this problem? The President has proposed a number of things that would allow students to borrow more money at lower costs and possibly use federal funding to keep a lid on costs. For now, however, there doesn't seem to be any consensus that a solution is imminent.
I would love to hear your ideas about how to solve this problem.
At the time this article was published Fool contributorTravis Hoiumis very long student loans, but he does not have a position in any company mentioned in this article. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdings, or follow his CAPS picks atTMFFlushDraw.The Motley Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of and creating a bull call spread position on Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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