Go to College or Become an Investor? – Check Out These Numbers!

Every year I am astounded by the rising cost of college tuition and I feel for the students lining up to pile on massive debt before they even have a chance to start earning an income or know what job opportunities might be on the other side of the 4-year commitment. USA Today recently published THIS article stating the average cost of tuition in the U.S. is now around $48,510.

It’s been more than a decade since I graduated from college and my perspective has not changed much. At age 18, if I had to pile on $48,510 in debt in order to obtain a 4-year degree, I simply would choose not to attend. If I had $48,510 sitting in cash, I would question very seriously if a college degree was the best use for my capital.

Now before the haters start coming out of the woodwork, allow me to explain that I am not advocating that high school graduates should not attend college; however, I do think it’s worth asking yourself the question:

What is the ROI (return on investment) from a 4-year degree vs investing that same amount of money?

My analysis is simply for educational purposes and is used to examine whether or not college makes financial sense from a return on investment standpoint. I am well aware that college is not all about dollars and sense. There are certainly reasons to pursue a college degree despite the financials and there are many careers that absolutely require a college degree. But since I am a nerdy numbers guy and an investor, I’m running the numbers for those interested like me!

College Tuition Cost 2019-2020

In addition to the USA Today article mentioned at the beginning of the blog, I came across an article on usnews.com which compares the annual cost of college from in-state public institutions, out-of-state public institutions and private colleges. You can check out the article HERE. We can conclude from the information and surveys conducted in these articles that $50,000 is a realistic figure for how much a student might spend on 4 years of college tuition these days.

How Much Do High School and College Graduates Earn?

Now that we know the average tuition costs, we need to better understand what a typical 4-year degree graduate earns in salary vs what a typical high school graduate earns. To help answer this question, I will reference The Bureau of Labor Statistics (BLS) which reports that Americans with a bachelor’s degree have median weekly earnings of $1,198, compared to $730 a week for those who have a high school diploma. To convert these into annualized figures, that is $57,504 (bachelor’s degree) vs $35,040 (high school degree).

Long-Term Investing Returns

I chose to use a 9% annualized return figure to represent the “alternative” investing scenario for two reasons. First of all, 9% is based on the historical stock market returns since inception (1926 to 2020) and secondly 9% is a conservative figure based on my actual real estate cash flow performance (2009-2020). References to stock market returns can be found in the Investopedia article HERE.

Let’s Compare The Two Scenarios:

Scenario #1 Johnny chooses to pursue a 4-year degree and spends $50,000 his parents saved for him to attend college. After graduating, Johnny finds a job that pays him $57,504 a year and receives 4% raises for the next 20 years. *Note: For sake of this example, I am not factoring in the added cost of financing the $50,000 tuition as many students do.

Scenario #2 Sally chooses to enter the workforce after graduating high school and ties down a full-time job earning her $35,040 a year and also receives 4% raises for the next 20 years. However, rather than spending the $50,000 her parents saved for her to attend college, Sally chooses to invest this capital into the stock market and real estate instead.

Now, let’s fast forward 20 years…

Scenario #1 Since Johnny spent his first 4 years after high school attending college, that means he has been earning a steady full-time salary for 16 years in a row and has been receiving 4% annual raises. Johnny now earns an annual salary of $107,703.91 thanks to the continuous 4% raises. In total, Johnny has earned $1,305,190 in his working career.

Scenario #2 Since Sally did not attend college after high school, she has been working for 20 years in a row and has been receiving her annual 4% raises as well. Sally now earns an annual salary of $76,776.95 thanks to the continuous 4% raises. In total, Sally has earned $1,085,160 in her working career. But wait! What about the $50,000 investment Sally made 20 years ago? The current valuation of her investment is now $300,457.58 thanks to the 9% annualized returns she’s been earning. When you deduct Sally’s initial contribution of $50,000, she has earned an additional $250,457.58 on top of her $1,085,160 salary earnings. Combined, Sally earned $1,335,617.58 compared to Johnny who earned $1,305,190.

Sally exceeded Johnny’s earnings over 20 years without a college degree AND she kept her initial $50,000 nest egg.

The power of investing prevails!

On a serious note, college is a big decision and is offered at an ever-increasing cost. While college may have been a wise investment in 1971 when tuition was about 1/10th of the cost today, it’s worth asking yourself some tough questions if you or your children are considering attending:

#1 Is the decision to attend college based on social pressure, peer pressure or the negative stigma of “not attending”?

#2 How much of a setback would $50,000 of debt be if you financed the tuition cost? How about $100,000 in debt?

#3 At what price does a college degree not make sense?

#4 Do you or your children have a strong “WHY” for attending college?

#5 If you or your children’s desired career path does not require a college degree, then does college still make sense? Consider business owners, sales professionals, entrepreneurs, and vocational trades.

#6 What if you could earn MORE than $50,000 without a college degree?

I’d love to hear your thoughts. Feel free to reach out with any comments or feedback. Thank you for reading.

To your success,

Travis Watts