How To Calculate The Value Of College

College. Your whole life you have been told it is the ticket to financial freedom. But with total student loan debt in the US being over $1.7 Trillion ($1,700,000,000,000). And with student loan debt needing to be canceled due to graduates inability to pay it back. Is the value of college really worth it? Or is college the path to freedom or to a life of debt servitude?

One of the biggest failings of the current education system & society at large is the lack of financial education. Kids who have never even been taught basic finances are being told to take out $10,000+ loans to pay for college. Many of them are going to schools with little guidance on what degrees will lead to high-paying jobs. And almost no one is being shown how to calculate the value of college.

It doesn’t have to be this way!!!

We will show you how to use simple corporate finance calculations to determine if college financially makes sense. You can easily calculate the present value of college vs. the opportunity cost of alternative paths. Additionally, if you decide go to college, we will offer some tips to lower your total debt burden.

The Cost of College & The Value of College

There are 2 different costs of college. The first is the very visible cost of tuition, room & board, books, travel, etc. The second cost is the opportunity cost of 4 or more years of lost wages & earnings. All of these costs should be considered when deciding to go to college.

We will also note that the college decision isn’t entirely financial. There are lots of non-financial benefits of college. Having a college degree is often a requirement to get into interviews at a traditional job, especially when starting out. But even beyond that, colleges often have benefits like:

• Job fairs, internships, & help with job placements
  • Most colleges have connections with local companies and can help place you in entry level roles
• Networking & alma mater groups
• Clubs, fraternity / sorority, and sports
• Job training and post-graduation support

All these add non-financial perks to college and are things to consider. However, many colleges fall short in fulfilling their duties in some of these areas so discretion is required.

Financial Costs of College

College comes at a steep price. Tuition and room & board are immediately obvious. But college also requires you to purchase books, stationary, and study materials. You also need to pay for travel to and from campus which can get very expensive if you go away for college.

The average annual tuition of colleges ranges from $5,000 to $35,000 depending the state as of 2022. And the most expensive college undergrad tuition is over $77,000 a year.

The average room and board is $6,500 for colleges in the US. And the average college textbook costs over $100 which can add $1,000s more over your college career.

All-in, the average total cost of college is well over $100,000 for a 4-year education.

…If You Graduate…

Another under reported aspect is the number of students who attend college, take on debt, but don’t graduate. Many of these students are from underprivileged backgrounds and are forced to drop out for financial reasons or due to family obligations.

Less than 2/3rds of the students who start college finish their 4-year undergraduate degree after 6 years.

The numbers are even worse when looking at those from lower income households. The exhibit on the right shows the poorest 25% households only graduate college in 6 years at a bit over 10%.

Again, that means they enrolled, took on some loans and expenses, but don’t have a degree.

It is an important consideration when comparing going to college or learning a trade. You may go, get all the downside of college and none of the upside.

Opportunity Cost of College

The biggest opportunity cost of attending college is the 4 years of lost wages & job experience. If you don’t attend college and instead opt to work, you will be making money during those 4+ years.

Simple math, if you make $40,000 a year working, in 4 years you make $120,000. Additionally, if you work at a job with benefits like a 401k, that is 4 extra years of contributing to your retirement and being invested in markets. When you are 18-22 years old, you can live a simple and inexpensive life which allows you to save & invest. You could save $10k, $25k, $50k or more during this time.

There is a huge difference in being 22 with no student loan debt and $50,000 in retirement savings vs being 22 with the $35k average student loan debt and no savings. Even in this simple explanation the difference is stark.

How to Calculate The Value Of College

In order to compare the option of attending college vs opting out, you need to understand the time value of money. Time value of money is the concept that $1 today is worth more to you than $1 in the future. To compare a future dollar vs money today, you need to discount the cashflow backwards. Once you have a present value of both cashflow streams, you can compare the results. (If this is a new concept, click the previous link. Time value of money is hugely beneficial in all aspects of finance.)

There is infinite number of combinations that can be used in calculating your personal college decision. So you should do the calculations with your own unique situation. We provide an example in this post for illustrative purposes.

Value of College Example Assumptions

For our example, we will assume 3 potential career paths:

• No college: Start working at a manual trade (plumber/electrician/high-end waitress) immediately after high school.
  • Earn $60,000 at age 18 with 2% annual raises

• College for low paying job: Go to a 4 year school and get a degree that results in a low paying career.
  • Earn $50,000 at age 22 with 2% annual raises
• College for high-paying job: Go to a 4-year school and get a degree in a higher-paying field
  • Earn $75,000 at age 22 with 3% annual raises

The projection is done for 22 years until the person is age 40. You could project all the way out to 65 or you can shorten the projection to a younger age. We chose 40 because after 40 your career and earnings start to be driven by what you have accomplished more than college. However, the calculation process is the same whether a 5-year projection of 500-year projection.

As you can see, the 4 years from age 18-21, college has a negative earning. We assumed a modest $15,000 a year cost for the 4 years. The “no college” path has 4 years of earnings instead of 4 years of expenses.

At 22, the high earner leapfrogs to the top earner and has 18 years of out earning everyone & getting bigger raises.

By age 40, the higher earner is making over $127k a year while the no college earner is under $93k. That is almost 40% more. We are starting to see the value of college show up in the high-earning career.

At age 40, how does each life path compare by total net worth?

Example – Results of Comparison

There are multiple ways to compare the numbers for the value of college.

First, you can take the present value of the entire cash flow stream under each option. We use a 5% discount rate as a proxy for APR on college loans to discount the 22 year cashflow streams above.

[Professor B.T. Effer Note – You can do this using the PV formula, or excel has a built in net present value formula =NPV(rate, cashflow). But the NPV formula does assume your first cashflow happens in year 1. So you need to take the NPV of age 19 to 40 then add the age 18 cashflow to match the numbers here.]

When you take the NPVs you get:

• $1.02 Million total for no college
• $936k for the college graduate with the high income
• $554k for the low income grad

Shockingly, despite making less money for 18 of the 22 years in the projection, the no college path still has earned more money. Having positive cashflows over the first 4 years by forgoing college is too much for the college graduates to overcome. This shows the issue with calculating the value of college only by looking at salary.

The second way to compare is to look at the future value of the savings from each option. If you assume a 10% savings rate, and that investing that money earns an 8% return, the results are:

• $429k for no college
• $384k for high income
• $238k for low income

Again, saving early and letting the money compound leads to a higher net worth by skipping college.

The takeaway here is not that college is less profitable. But to highlight 2 important points about the value of college.

First, if you go to college and pursue a path that earns less than you could earn without college, it is significantly worse. (Orange lines vs blue lines). This seems obvious, but many students go to college for degrees or careers that are ‘white-collar’ but low paying. This is fine if you get some non-financial value out of the job, but financially you are putting yourself in a hole.

However, you should run the numbers and see if you are actually happy with the low financial success that comes with that path. And if you do pursue that path, you should try to minimize the upfront cost by going to college as inexpensively as possible. We acknowledge that for some people, the value of college is in the intangibles of an emotionally fulfilling career, not the money.

Second, even if you go to college for a career that earns more, you may be surprised at how far it sets you back. In the above example, you make 25% higher starting salary ($75k vs $60k), but still are behind at age 40. You are starting to catch up though. And if we continue the projection past age 40, eventually the high-income college career will be more profitable.

Doctor vs. No College: Value of College Example

One other quick example is comparing no college vs a very high earning and prestigious career.

Doctors make very high incomes. What if you go to school to get a doctorate and graduate to ultimately make $200k a year starting. Most doctors need 12 years of school and 2 years of residency where they make under 1/2 of their ultimate salary.

From ages 31-40 you are making well over twice as much as if you had skipped college. But for 12 years you had negative cashflow to pay for college and graduate school.

The result of the present value calculation is:

• $1.02 million for no college
• $929k for doctor

Similarly, your net worth is under $360,000 as a doctor at age 40.

Now clearly you will surpass the no college route in your 40s. But this simple exercise shows the impact of delayed earnings.

Many students don’t know how to do these calculations and it leads them to making suboptimal decisions around attending college.

Notes on Calculating the Value of College

You can look up the salary ranges of almost any career and the cost of colleges you plan to attend. With these numbers, you can do a comparison for your optional career paths following the above examples.

In general, the financials will be better if you:

• Spend less attending college
• Graduate college sooner
• Choose a higher paying career
• Save a higher percent of your income

College is one of the biggest financial decisions you will make, so don’t make it lightly. Run the numbers and have an idea of your situation. That dream school may sound great, until you see how unprofitable spending $50,000 a year for college is. Especially if you go and get a median salary after your high-cost education.

10 Tips & Tricks to Lower The Cost of College

The cost of college is one of the major drivers of your financial success. Therefore, we have compiled a list of recommendations that can help you drive down the cost:

1. Be a resident assistant (RA) / community assistant (CA)
   • Typically this has you doing a few hours of work a month and having to be ‘on call’ a few nights a month. But you usually get free housing, free food, and even a small stipend.
2. Buy used textbooks and buy during the ‘offseason’
   • If you know what classes you need to take, you can buy used textbooks at the end of the semester for cheap. This can save $100s a semester in costs for a little planning on your part.
3. Living on vs off campus
   • Compare the price of on campus and off campus housing. Often you can find housing off campus for much cheaper, but you need to factor in cost of travel to campus.
4. Use community colleges for general education
   • See if any community college credits can be transferred. You can often take your gen-ed classes at a community college for significantly cheaper.
   • Additionally, many community colleges cater to adults going back to school and often have night classes and classes during summer & winter break. You can graduate a semester early by taking 1-2 extra classes a year at a community college.
   • Lastly, you can take a year after high school to take as many community college courses as you can. French Cinema 101 is likely the same value to you whether at your core school or local one.
   • Your degree will still be from your core school even if you save money by getting community college credits.
5. Use AP / College credits from high school
   • Similarly, if your high school offers a way to get college credit, take advantage of it. Many students are able to come into college with almost a full years worth of college credit. This allows you to save both on an extra year of college cost and start working sooner.
6. In-state vs out-of-state college
   • Most states offer sizable discounts for in-state students. You may dream of going away for college, but that likely adds significant costs to your degree.
7. College sharing with sister schools
   • Many colleges have relationships with other universities. If you really want to go out of state, see if there is a school that will charge you the in-state tuition price due to a relationship with your local university.
8. Financial aid, grants, and scholarships
   • There is a plethora of scholarships and grants out there. They are often very under-applied for. Spend time searching and applying for any and everything that you qualify for. Students can find 5-figures worth of small awards for the price of submitting an application with a short write-up
   • Financial aid is huge. Get your FAFSA completed and submitted. And then reach out to the school directly to ask for more aid. You would be amazed how much additional money you may be able to get by just calling and asking for it.
9. ROTC
   • The ROTC program helps thousands of students attend school. You have to do some extra training and some service, but this is a viable option many students use. Additionally, many of the ROTC post-college service jobs are desk jobs where you can learn a skill and get paid.
10. College jobs
    • Both on and off-campus jobs can help you round out your financials while attending college. Many jobs involve little more than sitting at the front desk. You can use this time for schoolwork and studying while getting paid.
    • Is there a local gym that needs a front desk worker? Security at a storage facility to watch the monitors? Doorman to buzz people in? These are all the types of college jobs that you can likely do schoolwork while being on the clock.

Alternative Rule of Thumb For Max College Cost

The above is a very thorough look at college costs and career choice. And we highly recommend doing the exercise if you or a loved one is getting ready for college. Student loan debt is quickly becoming one of the highest burdens to achieving success.

Outside of a home, the 4 year cost of attending college is the most you will likely spend on any one decision.

However, we understand simple is often preferred. Therefore, an alternative simpler rule of thumb is the total student loans you take out should be less than your first year’s starting salary. If your starting salary at your likely first job after college is $50,000, then you should choose a college you can attend for the full required time to get a degree that requires less than $50,000 in loans.

This rule does have its own set of issues. For example, some careers have low initial salaries but quick growth over the early years.

Also this rule is hard to apply to going back to school for a higher level degree.

The Final Word – Calculating the Cost of College

College can be a hugely valuable investment in your future. It can help you get a high-paying career and be on your way to building wealth. But if you make poor financial decisions, you can set yourself up for a long-time of financial pain.

You should try to minimize your out-of-pocket costs to attend a school. Then try to graduate ahead of schedule. And make sure to choose a career that offers you a high future income.

You now know how to calculate the cost of each potential college and career decision. Now you can be one of those people who use college to improve their financial future.

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