When I was 12 years old, my family moved to the United States from Colombia. It was clear to my brothers and me that the main reason for my parents’ decision was to provide us with the best higher education in the world. But is a college degree in the U.S. really worth the $100,000-$250,000 investment? Generally, people would answer "yes" to this question. It must be...right?
As is so often the case, once you dig a little bit deeper into any question, the answer is, “it depends.” To explain what we mean by this, let’s start by tackling the question of whether or not college education matters at all.
Does a College Education Matter at All?
In today’s economy, where technological advancements move at a staggering pace, some argue that experience trumps formal education. College education is supposed to prepare you for the future world in which you will be living. This means that the curriculum should ideally be ahead of the technology curve. In reality however, this is more often than not unfeasible, and is compounded by the facts that 1) the American education system is still modeled on a 19th century approach, designed for the industrial era and 2) the cost of college has increased over three times faster than inflation over the last 35 years. Some may argue that your time could be better spent watching Khan Academy video lectures, and your money could be better spent starting your own business. Others, like Peter Thiel, even go as far as calling American higher education a bubble.
The charts shown below, present the other side of the coin. As illustrated in the first chart, the annual earnings of Americans with a bachelor’s degree is 1.6 times higher than that of an individual without a college degree. In addition, the second chart shows a college graduate is twice as employable as someone who never went to college. From this data we can see that, on average, a college degree increases both your chances of employment and your earnings once employed. Even though the education system may be trawling behind the technology curve, I think it would be unfair to say there is no value in a formal higher education. (For related reading, see: On-the-job Training vs. a College Education.)
Source: BLS, Zoe Financial, Inc. Assumptions: 50 work weeks per year
Is All College Education Worth It?
Ok, so there is value in college education, but is it worth going to college, no matter which one you choose?
The short answer is no.
A nice way of figuring this out is to look at schools' net return on investment (ROI), how the financial benefits gained from attending the school compare to the financial costs. A positive ROI means the benefits outweigh the costs, while a negative ROI means the costs outweigh the benefits.
Some colleges have proven to be worth their fees and some have not. Payscale, which focuses on shedding light on employee compensation, took a comprehensive approach to quantify the ROI for students attending U.S. private and public colleges. It did this by surveying hundreds of thousands of full-time employees who have only a bachelor's degree. Like any research, it is not all encompassing and it has its faults, but I think it serves its purpose for this discussion. (For related reading, see: Are U.S. Colleges Still a Good Investment?)
Colleges That Are Worth It
Many people may question whether Ivy League colleges really provide enough value to justify the costs, however, the list of Payscale’s top 20 private colleges by net return on investment includes MIT, Princenton, Brown, UPenn and Harvard.
Another factor to consider here is the type of graduate a college produces. A fun example is the list of the Top 10 global colleges that produced the most founders of billion-dollar startups over the last 12 years. According to research done by Sage, a UK-based accounting firm, it turns out a staggering 172 out of 498 entrepreneurs who founded or co-founded the world’s 250 “unicorns” earned degrees from only 10 universities. So, if you want to create the next Snapchat, attending Stanford will not necessarily guarantee anything, but it won’t hurt your chances. (For related reading, see: Where Do Unicorn Founders Go to College?)
Colleges That Aren't Worth It
The top of the "Best Value" list shows us which colleges give you bang for your buck, but there are some schools at the bottom of the list that actually generate a negative ROI. This means the median earnings of graduates over 20 years after leaving these schools were lower than the cost to go there. So, going back to the original assertion that any college education is a good investment, it is fair to say evidence proves otherwise.
Although it is clear a college education can increase your chances of finding a job and your salary once employed, it depends a lot more on the college itself than one might think. In some specific cases, you may be better off not attending school and investing the money in the S&P 500—the ROI over the next 20 years may be greater than the alternative. (For related reading, see: College Tuition vs. Investing: Is It Worth It?)
Disclosure: Nothing in this article should ever be considered to be advice, research or an invitation to buy or sell any securities.