Is college worth it? An analysis

After reading a recent very bad blog post (here), saying that college was not worth it because of high upfront costs, I thought I would take the same data and analyze it the right way.

The average (median) college grad earns about $51,110 per year, while the average (median) high school graduate earns $29,337 per year. The average annual cost of a private university is $30,367 per year. I figure that college takes 5 years and the HS graduate will thus work five more years. So there will be 40 total years of work for the college graduate and 45 for the high school graduate. Using 7% as my interest rate, I calculate the net present value (at the end of high school) of the high school graduate’s earnings to be $399,145.19. For the college graduate I figure a net present value of future earnings of $681,384 at the end of college. Discounting that plus the payments for college back to the end of high school five years earlier gives us a net present value of ($485,817 – $124,511 = $361,306). So college appears to lose. Let’s make this a little more realistic and see what happens, though.

To be more realistic we give the HS graduate an annual 2% raise starting when he starts his job. We give the college graduate an annual 3% raise beginning at the same time (because the value of a college education will be increasing each year he is in college). We increase the cost of college by 5% a year. Discounting all future college costs and earnings at 7%, we find the net present value of the college graduate’s earnings to be $651,485, whereas the net present value of the high school graduate’s earnings are $504,266. So even taking a long time to finish college (5 years), not working at the time, and going to an expensive private school with no scholarships, the college graduate makes out like a bandit relative to the high school graduate.

The benefits to college are real and large. Because non-skilled jobs will probably continue to disappear, my estimation of 2% annual raises for the HS graduate are probably way overoptimistic and the benefit to a college education is even larger than my estimate.

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