Nothing better describes beating a dead horse than writing a blog post about whether or not a 4-year degree is worth the cost. But since I have a club in hand, point me to the nearest dead horse.
The statistic you’re most likely to see is that a 4-year college degree is worth roughly $800,000 in increased earnings power over the 45 year working life of any college graduate. The NPV of $800,000 over 45 years allows us to see the value of a college degree on a pure dollar and cents basis at various discount rates:
2% discount rate: NPV = $534,731.50
4% discount rate: NPV = $383,073.75
6% discount rate: NPV = $291,243.83
Now obviously there is some conflict in making a calculation so simple. Primarily, the leading concern is that of skewed data. I calculated the net present value of 45 annual cash flows of $17,777, which assumes that the difference in earnings power between college and non-college grads is a perfect $17,777 per year. For this to be true, earnings would have to share a perfectly linear relationship where a college grad’s earnings equal non-college grads’ earnings plus $17,777. Y = X + 17,777
Knowing full well that earnings growth usually comes in the form of percentage-based annual raises; a simple linear model doesn’t work perfectly. Also, the value of a marginal dollar is variable. An extra $1,000 is worth far more to someone who makes $20,000 annually than someone who makes $500,000 per year. But we’re going with what we have.
A 4-Year Degree’s Competitive Edge
There is more to consider than the simple net present value of a college degree. We must also understand the competitive advantage a 4-year degree holder receives over a non-college graduate.
According to the US Census, 32.1% of Americans ages 25-34 have a 4-year bachelor’s degree or better. This statistic is far more reliable, in my view, than Pew Research statistics which measure only the number of people with a bachelor’s degree or better who are 25+ years old. College admissions and total completion have risen considerably in the span of one generation, a point which many overlook.
The competitive edge for a bachelor’s degree is limited slightly by the rate of growth in jobs requiring a bachelor’s degree. According to BusinessWeek, the United States will create 47 million jobs in the next 7 years, of which only one-third will require a 4-year degree.
Given that 33% of all new jobs will require a 4-year degree those who complete college do maintain a considerable competitive advantage. If 32.1% of people complete a 4-year degree or better, and 33% of new jobs require such a credential, then the ratio of new jobs to percentage of college graduates is tilted slightly in the favor of completing a college degree.
School and Field of Study Matter
Using our net present value calculations of $291,000 on the high end, it would seem that most students can complete a degree at a price much lower than the upside. The WSJ reported last week that median family income for people with at least a bachelor’s degree was $99,707.
This figure seems low, to say the least. Using my position as an example, my girlfriend, who is studying health care administration, will graduate into a field where starting salaries aren’t much lower than that median figure. With a master’s degree, earnings potential quickly rises above $120,000. A master’s degree requires only a $30,000 investment.
My finance degree could still be worthless, yet we’d earn an income significantly higher than the median due only to my girlfriend’s interest.
Proximity to “the action”
Obviously income potential varies by how close you are “to the action.” Earnings potential in finance is, for the sake of discussion, unlimited. Being “close to the action” is to be on Wall Street, where the beaucoup bucks are. Working as a bookkeeper at a small business isn’t going to bring home the bacon.
In healthcare, the action is in research, or “risky” careers where liability is compensated with additional income. Surgeons make bank; family doctors make a good living, but don’t make a killing. For all intents and purposes, my girlfriend will have higher earnings potential in administration than as a family doctor, which sounds weird, but it’s all about proximity to the action. Potential administration jobs include the responsibility of managing a business.
Doctor, nurse, or whatever jobs require keeping a watchful on people’s health. Keeping people healthy is a derivative of keeping a health care company profitable—the “action” isn’t in saving lives, but building a profitable health care company. Take it or leave it; it’s how the world works.
Sidebar: If you’re for one second even second guessing the prospects of the health care industry and the value of a degree in health care, you’re freaking nuts. Even if you’re not working to generate cash flow, you’re still going to make far more than a career in which you have similar proximity to the income-producing elements of a business. Supply and demand, homie. If I had an interest in health care, it’d be a no-brainer.
Paying for Pedigree
This is one of the few areas where I see a college degree to be most valuable. A degree from a top school has an effect nothing else can rival, which I dub the “shut up and listen” effect.
If you put Harvard on your resume, you’ll be getting an interview. If you have a Stanford MBA, tech conferences will invite you to speak. If you have a degree from a school that isn’t in the top 10, or at least the top 20…well, then, you might as well shop at the bottom.
This is my rationale at least. I couldn’t bear the monotony of high school, so I said “screw it.” Later, knowing full well colleges wouldn’t dig my GPA, I said “screw it” to filling out an application for them. Now I go to a less than awesome, but inexpensive school.
If I were accepted into a top 20, I probably would’ve taken it, and financed it. But be that as it may, it made very little sense, to me, to spend money like it’s nobody’s business for a school that isn’t at the top. What’s the point? All or nothing, am I right?
I think I’m right. This is the thing: the expectations of top schools are completely different than those which are not academic powerhouses. If you go to Harvard, you go to prove your smarts, which a degree eventually does. If you go to School X, a school without a pedigree, then you’re expected to have learned about your major of interest while you’re there. Recap: top school proves your smart, nontop-20 schools set the bar for how much you know about your given concentration.
Downsides to Degree Frugality
According to the same WSJ article I’ve made mention of, going cheap on a degree increases chances of failure. Boy, do I believe it. The article says plainly:
Students who go to a lesser college when they’ve qualified for a highly selective one are 20% less likely to graduate, our research shows.
No doubt about it. I’m actually quite surprised the number isn’t higher. I can see easily how going to a school that isn’t up to par with your previous standards would be a threat to graduating. Now, I’m not going to award myself a 150 IQ; however, I will give myself at least 100. The middle 50% of people at my school have an effective IQ of 89-112, based on SAT to IQ conversions.
…And now I know why I thought so little of my peers in freshman pre-requisite classes. If you have a thirst for knowledge then going to a lesser college is just going to grind you into the ground. Most noticeably, you’ll wonder why, even at college, phallic jokes are still funny. Alas, these people disappear quickly; although a few manage to stay in for far longer than you’d ever think possible.
Is a 4-year degree worth it?
Yes and no. This is actually two questions in one.
From a microview, the view of you as an individual, a 4-year degree is worth it. It’s by-far the easiest way to get through round 1 of HR hiring nonsense, and a sure way to better a career. Improving your odds at a good-paying career that makes you happy requires some risk management, and possibly that you cut corners.
However, from a macroview, it’s a completely different ballgame. Should we, as a people and collective nation subsidize higher education? The answer to this question is, in my view, absolutely not.
Beat a dead horse with me–is a 4-year degree worth it?