Thoughts on college ROI
(Update: this argument was restated and greatly improved in a later post here.)
I heard this week that Georgetown University now costs $65k per year, all in. I verified it afterward: tuition is $35k, the rest living expenses.
Costs are similar at many private schools.
You see gee-whiz stories like this all the time, but I’m not going to do that. Let’s try a little arithmetic instead.
Let’s say you borrowed the entire cost of a 4-year private college education, as many people do. Student loans are 30-year amortized, just like home loans, so at 5% interest, your payment is about $1400 a month for 30 years.
But that’s an after-tax expense. Student loans get almost no tax deduction; let’s say you qualify for the maximum deduction, $2500 per year. Result: your PRETAX cost to service that debt is a bit over $24,000 per year.
Here’s where it gets interesting. The median college graduate’s income is about $45,000 per year, while the median high school grad’s income is $26,000.
In short, college increases your pretax income by a median $19,000. You then pay out $24,000 on those student loans, and… well, I hope you learned enough arithmetic at that fancy college to realize YOU ARE HOSED to the tune of a $5,000 net loss per year, for the next 30 years.
Even the above dramatically understates the problem, because it ignores that the high school grad pays a much lower marginal tax rate; that tuition is still rising faster than incomes; and, most importantly, that the interest rate on your student loans in the future is highly, highly likely to be much higher than 5%.
In short, it doesn’t work. It can’t work. Unless you have a full scholarship or wealthy parents, you have only a few logical choices.
- Go to an inexpensive public university.
- Go to a top-tier private school that is highly likely to increase your income by much more than the median. It’s Ivy League or bust — literally.
- Choose only a major that pays far more than the median. Art history majors, be afraid.
- Borrow the full amount, then default and skip the country.
- Don’t go to college.
Tough decisions coming, folks. And to think that, just a couple of years ago, your hardest choice was, “Escalade or Navigator?” HELOC-funded, of course.