The Empty Promises
From a very young age, our parents consistently reinforce the utopian notion that a college education will portend a successful career. It was believed that upon graduation, Millennials would be able to find an awesome career and be financially independent, and college is unquestionably the best investment one can make in a lifetime.
The future seems so bright and promising for the brightest and most talented individuals. Unfortunately, this ideal circumstance may not be entirely valid because, in reality, the odds are stacked against the hopeful Millennials.
The Value Investor
“Price is what you pay. Value is what you get.”
These are the words of wisdom from Warren Buffett, who’s arguably the greatest investor of our time. Buffett clearly understands the concepts of intrinsic value and long term, perpetual benefits of his investments. After all, who else is a better choice for an investor to model his or her investment strategy than the Oracle of Omaha?
Education is the best investment that one can make in a lifetime and is the key to prosperity; however, education has not only been losing its value throughout the years, it has also been perceived as playing a less pivotal role in an individual’s life. It is important that future and current college students fully understand the cost, value, and return on investment (ROI) associated with their degrees.
According to an empirical study performed by the National Center for Education Statistics, there were approximately 17.7 million students enrolled in higher education beyond high school in 2012 compared to the reported 12 million students in 1990. This fact is far more striking when we consider that the 48% net increase of higher education enrollment occurred over a short period of just two decades.
In addition to the rising costs of college tuitions, average debt of $30,000 per graduate and the under-employment and unemployment rate of 50% at graduation are frightening thoughts for most students to fathom. There needs to be a sense of urgency and practicality in deciding which college one should attend and which degree(s) one should pursue.
The Costs: What is the ultimate goal of attending college? The harsh reality is that the main purpose of college is for one to learn a set of skills in order to obtain gainful employment upon graduation. Let’s assume that an average student loan is $30,000 at an annual interest rate of 5% for 20 years and that the average starting salary for a new college graduate is estimated at $45,327. Based on these assumptions, we can calculate that a monthly loan payment of $198 should be manageable with an entry level salary. This monthly amount was calculated using the PMT function in Excel based on the previous assumptions where the monthly interest rate is (.05/12), the number of payments is (20×12), and the present value is $30,000.
The Net Income/Gain: The federal tax rate for an individual with taxable income of $45,327 is 25% in addition to another $4,867.50, an average state tax rate of 6%, 4.2% SSN tax withholding, and 1.45% Medicare tax rate. One can take into consideration the 401(k) contribution of 6% and healthcare costs. With these assumptions, we derive that the net pay is $19,327.63 annually or $1,610.63 monthly.
The ROI: Using what we know, the ROI for our college degree, on average, should be:
([$1,610.63-$198.00]/$30,000)*100 = 4.74% annual return for an average starting salary.
In reality, many students do not plan ahead and demonstrate little to no interest in pursuing practical degrees such as Finance, Accounting, MIS, or STEM degrees. These degrees are not only more marketable to future employers, but they also provide higher ROI than the national average (7.87% versus 4.74%). In comparison to the historical ROI of 9.3% on the Standard & Poor 500 Index (S&P 500), it would be a better investment for the money to invest in the S&P 500 index fund if one chooses not to attend college and obtain a practical degree.
As a positive outlier among my Millennial peers, I hope this article can help the next generation of students prepare for their next step in life. Please choose a practical and applicable college degree that will help you build a foundation of your future—for yourself and for your loved ones. If you think education is expensive, wait until you see the cost of ignorance.