Exploring the gap between what you pay and what you get
I can still remember when I was suspended from school in 10th grade. I was embarrassed, I was frustrated with myself, and I was afraid.
Part of my fear related to how my mom would react to the news. I didn’t think she would be mad, but even her disappointment would be more than I thought I could stand.
But that was just part of it.
Do you want to know the biggest reason I was afraid?
I thought I might have ruined my chances of getting into a good college.
For decades the path into adulthood in America has been clear: Go to school because you have to and get good grades so that you can get into college which will unlock the door to a “good” job.
To suggest that college might not be a worthwhile use of time is a heresy against the American religion on par with suggesting that buying a home might not be a great investment or suggesting that it’s time to move on from cars.
But the world we live in is very different from the one where college became the default portal into adulthood. The academy — used today as a sort of vocational training to prepare you for getting a job — actually predates the modern notion of jobs as we know them.
When evaluating the usefulness of college, I propose that its value is a function comprised of three factors:
- The costs
- The benefits
- The alternatives (opportunity costs)
The first step is to make sure the benefits outweigh the costs, but then you still have to make sure that college is better than the alternatives.
Right off the bat, two things immediately stand out.
First, the issue of whether or not college will be worth it for you (or your child) is more complex than we can break down here. Each of these three factors encompass a broad range of options and outcomes and you can construct situations ranging from college being a no-brainer to a waste of time and everything in between.
Second, whether or not college is still worth it, it is inarguably declining in value and is worth less than it’s ever been. The price of college has risen astronomically. The benefit has become diluted by increasing numbers of college graduates. And the alternatives are better than ever before, both for self-education and for replacing the earning power of a degree.
All three factors are consistently moving in the direction of eroding the value of a college education. If college is still worth anything, it’s because it started out as such a screaming bargain that even a shell of its former self is worth something.
But let’s explore each of the three factors in more depth.
One thing that’s important to remember when weighing the benefits and costs of college: The benefits are all speculative, the costs are guaranteed.
When you borrow $20,000 to get a degree, you may or may not make more money in your career than you would have without the degree, but you will have to pay back the $20,000 with interest.
There are four different ways of thinking about the cost of college:
The Price Tag
This is the main cost, and it has been rising much faster than inflation.
There are likely two factors that have led to the astronomical price of a college degree.
First, there is a pervasive cultural belief that a college degree unlocks the door to wealth and fulfillment.
Second, the government guarantees your ability to get a loan. Colleges can charge whatever they want because they know consumers have blind faith in their product and the ability to pay. Even if they charge more than the consumer can afford, it’s okay for them, the government will make sure they get paid.
This means that college costs a crippling amount of money.
At an average cost of just about $25,000 a year, a 4-year degree can easily cost you more than $100,000 in tuition and fees alone. And by the time you read this, the average might be even more expensive.
Borrowing money isn’t free.
Fortunately, the interest rates on many student loans are fairly low and some loans don’t start accruing interest until after you graduate.
But interest can add up.
The more money you borrowed, the higher the interest rate and the longer it takes you to pay off your loans, the more total interest you will pay.
It’s entirely possible that the total interest that you pay could be 50–100% of your initial principal balance.
That’s right, it’s possible for interest alone to double the cost of a college education. Again though, how much interest you actually pay will vary wildly depending on your initial balance, interest rate, and how long it takes you to pay back your loan. Just know that interest can cost as much as college.
The Forgone Salary
This is what economists would call an opportunity cost of education. Going to school for four years means that you miss opportunities to do other things, like get a full time job.
You could object here that some people do in fact get a full time job while at college, but that’s missing the point. The person who can work full time while also attending college full time is the kind of person who could easily hold down two jobs if they wanted to. And while working two jobs is a huge sacrifice, so is going to school full-time while working full-time.
At a job that pays just $20,000 a year, this is an $80,000 cost for a four year degree.
And of course, it’s higher at higher income levels:
- $30,000 a year is $120,000 over four years
- $50,000 is $200,000
- $75,000 is $300,000
There’s another opportunity cost involved here. The person who is working is able to invest. Let’s take the hypothetical $20,000 a year and assume the person is able to invest 20% (not an unreasonable assumption since young adults are usually able to have a very low cost of living — especially if they are living with their parents). Over four years, this person will have $16,000 invested — even assuming $0 in investment returns.
We all know that it is important to get started investing early. Working instead of going to school is one way to do this. Many recent college graduates feel like they can’t start investing yet, because the money that would go towards investing is going towards paying back their student loans.
The Forgone Experience
If you don’t get a degree but manage to get a job, you’ll start out on the bottom rung of the career ladder.
If you do get a degree and it leads to a job…you’ll still start out on the bottom rung (you just hope it will be the bottom rung of a more lucrative ladder).
The big difference is that skipping school gets you to the bottom rung four years earlier than taking a college detour. Ultimately, the skills you need to be succesful in the work force are going to be learned at work, not at school. Having a four-year head start learning on the job is a huge advantage.
The Hidden Cost: The Sunk Cost Fallacy
If humans were rational, we would evaluate our decisions based on their future prospects. So if it makes sense to drop out of college because some other path looks better, we’d drop out.
But humans aren’t rational, we’re emotional, and we make our decisions emotionally.
So if it looks like the best decision is to drop out of school but you’ve sunk three years and $150,000 into your education, chances are you’ll finish your degree.
This is known as the sunk cost fallacy.
If you were wise, you’d undertand that the three years and $150,000 are irrelevant, because there’s nothing you can do about them now. If there’s a path avaialable that has as much upside as finishing your degree but doesn’t cost one year and $50k, that’s the right choice, even if it causes you to “waste” three years and $150,000.
Everyone knows that college has been getting more expensive. Most people choose to ignore these rising costs because of their unassailable faith in this point: The benefits of a college education are unquestionable.
Here’s the big one: A college graduate can expect to earn about a million dollars more over the course of their career than a high school graduate.
How do you argue with that?
Well, lets start our argument by using a couple of the things we learned at college.
One thing I learned at college is that cause and effect is notoriously tricky to pin down. In science, you try and conduct an experiment where all variables are held constant except for one. By manipulating that one variable, you can measure how much it affects the outcome.
Of course, there’s no way to run an experiment that demonstrates the effect of earning a college degree. Any “study” that you’ve ever seen showing the benefit of a college degree is simply looking at how much people earn over the course of their careers at various levels of educational attainment.
The numbers show that college graduates earn more than high school graduates, but we don’t know why. As we learned in Statistics 101, correlation doesn’t necessarily imply causation. It could be that going to college is a causal factor in higher lifetime earnings, or it could be that some other causal factor is what is accounting for both the college degree and the higher earnings.
But surely there’s no factor that we can point to capable of explaining both right?
Pop quiz: Fill in the missing adjectives for me: College only admits the (adjective) and (adjective).
I’m going to stall for a bit to put some space on the screen between the prompt and the answer, but I’m guessing this one wasn’t very tough for you.
I’m sure you’ve heard it before:
College only admits the best and brightest.
So here is a very serious question: do college graduates earn more money because college helps you make money? Or do graduates earn more because they are the best and brightest, and it would be absurd to think that the best and brightest would fail to earn more than everyone else?
To be fair, it’s probably a bit of both: part of the discrepancy between college graduates and non-college graduates come from the value of the education and/or degree itself, and some is the residual effect of being smart, capable, and driven.
For instance, my wife got a bachelors degree in nursing and immediately got a job with a very good income. Nursing is a skill that is incredibly valuable to society and it would be very difficult, if not impossible, to get a job as a nurse without the appropriate degree.
This is an instance of college providing valuable vocational training and helping you gain access to jobs that have appropriate barriers in place to keep unqualified candidates out.
My wife racked up five figures in student loan debt, but thanks to her combination of high income and frugal living, she was able to pay off her student loans in just over a year.
Nursing is a great example of the two major benefits of a college education that I think are valid:
- Some degrees equip you with rare and valuable skills that do in fact put you in a position to earn more money
- Many desirable jobs use a college degree as a kind of screening mechanism. Even if a college education is not needed for the position, many employers look at a college degree as proof that a candidate is smart, capable, and can follow through on commitments (like graduating).
In his book The Case Against Education, Bryan Caplan points out that as far as we can tell from the data, a large part of the benefit of a college education is actually just ability bias (this was our point earlier about the “best and brightest”). Of the remaining benefit, the vast majority is due to credentials, not the content of your education. By and large, employers pay for your degree, not what you learned in school.
So there are financial benefits to a college degree, but the case is not nearly as solid as a naive examination of the data would lead you to believe.
For me, this is the best reason to go to college, but I’m biased. College was a tremendous time of personal growth for me, although this had more to do with the church I went to and friends I made than the actual formal education.
College can be an enriching experience that exposes you to a lot of interesting people and ideas and it can provide a comfortable transition into adulthood.
The years I spent in college were some of the best of my life. In college I formed many treasured memories that will last a lifetime and formed deep friendships that are still thriving today. In fact, I met the woman who is now my wife during my junior year. That alone was enough to declare college 100% worth it.
But of course, college isn’t just the social experience, it’s the academic experience. Like we’ve covered, that experience comes with some big price tags.
The Declining Benefits and Rising Costs
Remember, part of the correlation between a degree and financial success has nothing to do with the degree, it’s about the quality of the person that gets the degree.
There are two ways in which a degree does directly lead to higher earnings: Credentials (the degree), and the transmission of valuable knowledge and skills (the education).
Of the two, the degree is more important than the education in most instances.
This means that the value of a college degree is highly dependent on the percent of the population that has one. If only 10% of people have a bachelor’s degree, then it’s a highly effective signal that you would be a valuable addition to a company. If 83% of people have a bachelors degree, you’re a dime a dozen.
Unfortunately for everyone with a college degree, more and more people continue to get them, eroding their overall value.
Since we know that the cost of a college degree has been skyrocketing over time, we can model the situation like this:
You can think of the green line as the financial benefit conferred by a 4-year degree and the red line as the average cost. I don’t know if the two lines have crossed over yet, but they are destined to.
Whether or not the average benefit exceeds the average cost, it is clearly the cast that the least valuable and/or most expensive degrees are already failing to pay for themselves over time.
One easy way of corroborating this? The student loan crisis. We’ve reached the point where student debt has become such a problem that many people want the federal government to forgive student loans. Why would you need someone to forgive a savvy investment? You only need someone to bail you out if what you got wasn’t worth what you paid.
Here’s where things get interesting, and I’m confident they will get even more interesting as time unfolds.
We still have all the traditional alternatives to getting a degree available to us:
- Go to a trade or technical school
- Get a job in sales
- Join the military
- Work your way up from an entry level job
But in today’s day and age, the internet has opened a whole host of new options. Let’s work through a few of them.
Create your own syllabus
One potential benefit of college is that it can teach you skills that are valuable and rewarded in the marketplace.
But college isn’t the only place you can learn things. Instead of learning how to code on a swanky campus, why not learn from your phone or laptop using an online course?
The the way things stand right now, even expensive online courses are much cheaper than degrees.
If you’re more ambitious, you don’t even need to pay for a course. You can cobble together a robust syllabus with all the information that is available for free already.
This approach gets more powerful when paired with the next alternative.
Show your work
It’s one thing to learn a skill. It’s another thing to show it off.
The internet has made it possible to have a public portfolio that is always visible. We don’t need to see your credentials, because we can see your results.
If you want to be a writer, build a writing portfolio in public.
Imagine the body of work you could build up if you didn’t spend four years going to class.
Find freelance work
Let’s say you want to write.
Start here on Medium. It doesn’t matter if you make much money or any money at all. Just write as much as you can and keep refining your work.
Soon, you’ll have some articles that are decent. If one or two of them pop, you’ll even have some social proof as well (e.g. I can say I have multiple posts with 100k+ views). You’ll leverage this portfolio into a freelance gig.
You’ll scour the internet looking for writing gigs and show them what you’ve got. Once you’ve landed one client, you’re a professional.
Build a business
Sticking with the idea of being a writer, let’s say you end up finding more clients than you can take on, a nice problem to have.
You can look for another writer to help you with the work. You shift more of your focus to finding clients, and less to writing now that someone else is picking up some of the writing load. You now have a system to bring in money that’s bigger than you. We call that a business.
Eventually, you could have a team of writers and you mostly just manage the relationships with the clients and make sure everyone gets paid while taking a cut for yourself.
The point is, starting a business doesn’t have to be an expensive, high risk endeavor. It can start small and scale.
And like we’ve covered, if you aren’t in school you have lots of time to scale your business while gaining real-world experience.
How to Do College Right
You’re going to get paid for your credentials, not your education. If you don’t finish your degree, you won’t land that high paying gig, even if you learned more about your major than your peers.
If you’re in college, your number one priority is to graduate.
Graduate ON TIME
The longer you stay in school, the more expensive it will be for you. Additionally, each year you stay in school is a year you miss out on salary and experience.
It’s okay to choose a major that takes longer to complete (e.g. many engineering programs), but you don’t want to take five years to get a degree that most people get in four.
Pick any major that leads to a lucrative career and doesn’t sound awful
In order to graduate on time, you’ll need to decide on a major. Don’t put too much pressure on this. You’re not defining your identity forever, you’re just picking a college major.
All other things being equal, majors that lead to lucrative jobs are better than those that don’t, but don’t pick a major that you know you will hate.
If you have your heart set on a major that isn’t particularly lucrative, don’t let me sway you. But if you have no idea what you want to study, it’s probably better to lean towards finance or engineering and away from cultural studies.
Apply for private scholarships
Back when Ramit Sethi, author of I Will Teach You to be Rich, was accepted to Stanford, he created a system to apply to over 60 scholarships that summer to help pay his way (and he teaches others how to do the same here).
College is expensive, but with enough scholarships it can be cheap or even free. In extreme cases, it’s possible to get paid to go to school. There’s no reason not to do this.
Consider state schools, community colleges, and other cheaper options
If you want to be a high-powered lawyer who rolls in the most elite circles it helps to have a degree that says “Harvard Law” on it. But for most careers, it’s the degree, not the chool that matters. Nursing is nursing whether you go to a community college or a name-brand school.
As Seth Godin points out, we should really use the term “famous schools” not “good schools.” Just because they are selective or have a large endowment or a good football program doesn’t mean they’re better than everyone else at teaching undergraduates. But it probably does mean that they cost a lot more.
Inexpensive doesn’t always mean low quality.
Live as frugally as humanly possible
Here’s a fact about human nature that most people never master even after they graduate: You’ll get used to wherever you live. In other words, you’ll be just as happy in the old, rundown apartment complex as you would be in a luxury suite.
The biggest factors in your cost of living are where you live and who you live with. Find some trustworthy companions to move in with you as roommates. It will keep costs down and build character. I would put bunkbeds in every bedroom if the lease allows for it. The more people you having sharing the rent, the better.
Develop your social skills
Join a club. Play intramural sports. Start a recurring foursquare game on campus on Friday’s (someone did this at UF when I was there and it was awesome).
College is a great time to meet people, but more importantly, to practice the skill of meeting people.
Above all: Don’t worry
I know college can feel like a make-or-break period where the entire rest of your life is set in motion. While it’s true the decisions you make in college can reverberate years down the road, you’re more resilient than you think you are.
If you pick the wrong major or if you fail some classes or if you don’t end up using your degree, it’s okay. You’ll survive.