Saw this analysis and thought that some folks might find it interesting:
Some guesses about the value of education at a 4 year university, average Joe:
Assume opportunity cost of 25K per year in lost wages (today's dollars) and PV of 86K in 4 years of total college costs also today's dollars (figured as initial cost of 20K per year plus 7% increase in cost per year deflated by rate of inflation of 3.5% and discounted by 3% ... the assumed originary interest rate)
That's about (with a discount rate of 3%) 179K in cost.
What amount over the next 43 years (to age 65 retirement) would make a break even for the school costs at a discount rate of 3%?
$7463 per year in real (not nominal) dollars in increased income. I imagine with the same hours of effort, one could invest wisely and earn a much better return.
An increase in real yearly income of 18,202 would be a 10% return, $35,814 at a 20% return. (Incidentally, the solution discounts costs at a 'safe' rate of return (as they are substantially certain), while the income is discounted at a 'risky rate of return' (as they are less certain) which, I believe, is the proper way to do discounted cashflow analysis).
Only if one manages the top of the class in a good career, is it a good cost / reward relationship, assuming the model captures all the inherent value. (It does exclude relationships, beer parties, and potential business parternerships ... hopefully not from the same groups).
And actually, the return is even smaller (and more accurate) if the increasing marginal tax rate is figured in (because these are only gross #'s).
In talking to high school kids about what they want to do with their lives, they usually tell me they don't know. I then encourage them not to go to college right away. I suggest they get a job and put the money they would have spent on college in some investment, even if it is just a pass book savings account.
Once they find out what the real world is like, what they like, and what they dislike, then they should try what they like for a while.
This process will usually take 4 or 5 years, that means that if they have saved as they should they will have $40k or more in savings (average college cost is about $10k per year). If they decide that they wish to enter a technical field, medicine, law, accounting, etc. then they have all the money they would need to go to school without working. They will also be 4 years wiser.
If they decide they want to start their own business they now have $40k+ of seed money.
I only have one student who has taken me up on this. He is 21, currently a BMW mechanic with 3 years experience making between $40k and $50k per year with $100,000 in the bank and he loves what he is doing.
Most of the other kids in his class (my youngest daughter's class, so I know most of them) are in their senior year in college with $20,000-30,000 in student loans and no job prospects.
Some guesses about the value of education at a 4 year university, average Joe:
Assume opportunity cost of 25K per year in lost wages (today's dollars) and PV of 86K in 4 years of total college costs also today's dollars (figured as initial cost of 20K per year plus 7% increase in cost per year deflated by rate of inflation of 3.5% and discounted by 3% ... the assumed originary interest rate)
That's about (with a discount rate of 3%) 179K in cost.
What amount over the next 43 years (to age 65 retirement) would make a break even for the school costs at a discount rate of 3%?
$7463 per year in real (not nominal) dollars in increased income. I imagine with the same hours of effort, one could invest wisely and earn a much better return.
An increase in real yearly income of 18,202 would be a 10% return, $35,814 at a 20% return. (Incidentally, the solution discounts costs at a 'safe' rate of return (as they are substantially certain), while the income is discounted at a 'risky rate of return' (as they are less certain) which, I believe, is the proper way to do discounted cashflow analysis).
Only if one manages the top of the class in a good career, is it a good cost / reward relationship, assuming the model captures all the inherent value. (It does exclude relationships, beer parties, and potential business parternerships ... hopefully not from the same groups).
And actually, the return is even smaller (and more accurate) if the increasing marginal tax rate is figured in (because these are only gross #'s).
In talking to high school kids about what they want to do with their lives, they usually tell me they don't know. I then encourage them not to go to college right away. I suggest they get a job and put the money they would have spent on college in some investment, even if it is just a pass book savings account.
Once they find out what the real world is like, what they like, and what they dislike, then they should try what they like for a while.
This process will usually take 4 or 5 years, that means that if they have saved as they should they will have $40k or more in savings (average college cost is about $10k per year). If they decide that they wish to enter a technical field, medicine, law, accounting, etc. then they have all the money they would need to go to school without working. They will also be 4 years wiser.
If they decide they want to start their own business they now have $40k+ of seed money.
I only have one student who has taken me up on this. He is 21, currently a BMW mechanic with 3 years experience making between $40k and $50k per year with $100,000 in the bank and he loves what he is doing.
Most of the other kids in his class (my youngest daughter's class, so I know most of them) are in their senior year in college with $20,000-30,000 in student loans and no job prospects.
Facebook
Twitter