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Education: Still Worth the Price?

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Over the past few months, hundreds of newspapers, blogs, and commentators have asked whether college is the next bubble. Most come to the same answer: Maybe.

What school are you going to? Who's paying? What's your degree? How's the economy? For some, higher education is indeed a bubble, in the sense that the benefits will never exceed the costs. For others -- maybe most -- it's still a worthwhile investment.

Those with a college degree outearn those with only a high school diploma by a long shot. In 2009, the average wage of a college grad was about double those who only finished high school. Since the early 1990s, college grads have seen their real (inflation adjusted) incomes stay roughly flat, while the high-school-only group has seen a decline of about 10%. It pays to have a college education. No doubt about it.

However, the entry price for that education is exploding. Consider how fast the tuition has outstripped the income growth of college grads:

Source: Federal Reserve; Department of Labor.

Since 1991, tuition -- measured by the Department of Labor's "tuition and school fees" component of the Consumer Price Index -- has increased more than threefold, while median wages for those with a college degree have increased just 70%. (Both measures are nominal, or not adjusted for inflation.) Importantly, the cost of obtaining a degree has grown faster than the cost of not having one.

As others have pointed out, tuition has grown faster than what many consider the most out-of-control strain on consumer finances: health-care costs. Tuition has actually increased at a comparable clip to last decade's bubble poster child, housing.

Source: Department of Labor; Case-Shiller National Home Index.

What's going on here? Hedge fund manager Peter Thiel offered his explanation earlier this year: 

A true bubble is when something is overvalued and intensely believed. Education may be the only thing people still believe in in the United States. To question education is really dangerous. It is the absolute taboo. It's like telling the world there's no Santa Claus.

But is that really the whole explanation? Americans do intensely believe in education. Unfortunately, for some that belief is justified, yet for others it is not. 

During the dot-com bubble, the intrinsic value of a company was the same, regardless of the investor. It didn't matter whether Warren Buffett overpaid for a worthless shell company, or if a donkey did. They both lost equally. 

Education isn't like that. The value one person receives from it is vastly different from another, even when both pay the same price, or even attend the same school.  

Here, Slate columnist Annie Lowrey makes a great point:

It could be that Thiel is right, that college students, en masse, are overpaying for their educations. But it seems more likely that some college students attending certain types of schools are overpaying. If you want to be an aerospace engineer and have the chops to get into Caltech, the quality of the education, contacts, and fellow students on offer might really be worth $200,000 to you. A diploma from the school practically guarantees a good salary. That is not true for many other institutions -- particularly not for online, for-profit schools, the worst of which egregiously overcharge for worthless degrees.

To extend that point, we have to talk about the type of jobs toward which the economy is shifting. Tomorrow's jobs aren't at General Motors (NYSE: GM  ) . They're at Google (Nasdaq: GOOG  ) . The latter requires, on average, more education. So as the job market shifts, more people have been enrolling in college.

The supply of colleges, however, has by and large not kept up with rising demand, with one notable exception: online, for-profit institutions, such as those offered by Apollo Group (Nasdaq: APOL  ) and DeVry (NYSE: DV  ) .

As Lowrey notes, these colleges are often woefully inadequate, particularly given the price. My favorite example: The Government Accountability Office highlighted a for-profit college that offered a massage therapy degree for $14,000, when a local community college offered the same program for $520. Paying tens of thousands of dollars for an education is still well worth it if you're receiving a degree that focuses on where tomorrow's jobs will be. Many degrees, however, do not -- yet they often cost the same price.

This is where Thiel's argument of intense belief comes in. If there is a bubble, it's in the idea that simply going to college is what matters -- not what degree you get, or how you'll apply it in the real world.

What do you think?

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. General Motors and Google are Motley Fool Inside Value picks. Google is a Motley Fool Rule Breakers recommendation. The Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (14) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 13, 2011, at 12:01 PM, emferguson wrote:

    What is being measured in the tuition cost? If it includes public colleges, then how much is the actual increase in college costs, and how much is more costs being shifted from governments onto students? My guess is that accounts for most of the increase, which means there really hasn't been such an increase and there's no bubble, merely a shift in how much of the costs are borne by students. If that measure is strictly private, that might explain why the for-profit schools are doing so well.

  • Report this Comment On May 13, 2011, at 5:31 PM, xetn wrote:

    Like so many things, it depends on the circumstances. However, Dr. Gary North has been writing on this issue for some time and one of his most interesting articles illustrates how you can get a degree very cheaply (in fact an 18 y.o. already has his).

  • Report this Comment On May 13, 2011, at 7:51 PM, TMFTypeoh wrote:

    Education for educations sake is worthless, IMO.

    I have a good friend that went to college, spent 100,000 or so, and became a mail man. Worth it? No.

    Now, on the flip side, if you go to college to become a nurse/engineer/doctor/business...etc.....THEN its worth it.

    Going, just to go, is not (unless you get an MRS degree).

  • Report this Comment On May 13, 2011, at 9:37 PM, markyaney wrote:

    Truly a taboo to question the value of education as Rich Dad does. I think it comes down to real "Education" toward a field of study/career path v. education for education's sake. It doesn't matter where I get my credential if it's the same one at various colleges, but I shudder to think of spending 3 or 4 times the price for it and the entry-level salary not being adequate to make the payments when I graduate.

  • Report this Comment On May 14, 2011, at 12:42 PM, TMFDitty wrote:
  • Report this Comment On May 14, 2011, at 5:10 PM, Realexpectations wrote:

    He is exactly right when he says its different from one person to another.

    I go to MSU Mankato they have one of the best Law Enforcement programs in the country there. There is a big difference between me milking those classes for everything they're worth and someone else who's motto is C's get the degree.

    Its all about what you make of it. For MSU Mankato its about 15,000 a year. I can honestly tell you going to the university was the best choice I have ever made with my life. It is frustrating though that I am graduating this coming december and I still can't get employers to take me seriously along with all my ambition I have. I would have gladly paid triple the price though for everything I experienced, best time of my life

  • Report this Comment On May 14, 2011, at 7:33 PM, cbak wrote:

    I think it depends on what you want to do with your life.

    If you are not accumulating debt it may be immaterial what you do for an education.

    The role of most education (after gaining basic skills) is to learn how to learn and how to apply the learning. (There may be value in some carears to learning to "network".)

    Then we learn in the work world job specific skills.

    It is easy to go much too far in debt for something that has very little value in the job we eventually do.

    There are certainly alternatives if we are ready to put some effort into looking for them.

    If we have learned "how to learn" education is available everywhere, including public libraries. Equivalency tests are available in most colleges/ universities after the info is acquired elsewhere.

    There is really no need to spend the amount of dollars that seem related to student accomodations etc in cities far from home.There seems to be a student "culture" affiliated with an expensive education

  • Report this Comment On May 15, 2011, at 10:43 PM, TicoHombre wrote:


    One of the best and most practical responses to the value of an education I've ever read. Thanks.

    This coming from a guy who never graduated High School till he I was 29 (took the CA high school proficiency exam). However, I make more than plenty of college grads working far fewer hours and have been semi-retired since I was 23 (now 49). I "learned how to learn". I speak two languages; have traveled and lived abroad; given public discourses in both languages to crowds of up to 10,000, etc...

    "I learned how to learn". Excellent!

  • Report this Comment On May 15, 2011, at 11:18 PM, Realexpectations wrote:

    college education doesnt mean that your GOING to make more money

    its all about what you make of, for me its a better chance of me being happy and not dread going to work like my parents did

    money doesnt run my life

    Family and friends are always the most important

  • Report this Comment On May 16, 2011, at 2:34 AM, Realexpectations wrote:

    just because you made a buck more doesn't mean your better than anyone else a lot of it has to do with character and your definatly showing a snotty side of person that no one wants to be around

  • Report this Comment On May 16, 2011, at 8:02 AM, TicoHombre wrote:


    For a 22 year-old you have a lot to learn. Wasn;t meant to be a bragging post, but rather one to illustrate what cbak was saying. It was profound and hit home. I merely gave a supporting example of what can be done when one has 'learned how to learn' and what can be done without an expensive education costing more than a house in many parts of the country.

    Snotty? You don't know squat and you don't know me. Too much tone can be read into a post. Don't fall into that trap.

    I wish you well on your law enforcement career. Always wanted to be a cop and I appreciate the services they perform.

  • Report this Comment On May 16, 2011, at 8:15 AM, TicoHombre wrote:
  • Report this Comment On May 16, 2011, at 3:32 PM, XMFRosetint wrote:

    I can't say it's the case for everyone, but I personally dropped out of college to focus on investing. It's worked out very well for me so far - it has improved my cash flow substantially and allowed me to invest more money in opportunities that have potentially very high rates of return.

    Some people will undoubtedly believe I'm making this up, but check out Samson Oil & Gas (SSN). I wrote about it for months on CAPS, and bought in at an average cost of $0.75 per share or so (I initially wrote about it at $1.15)

    That said, I'm a very unconventional person and always have been. I guess I've taken Rule Breaking principles and applied them to life, instead of just investing.

    None of this is to say that I'm not interested in going to college. Should my well of high quality investment ideas run dry, I'd probably go back. That hasn't happened yet, fortunately, and hopefully it won't for quite some time.

    I think there are a few keys to determining the value of a college education:

    1. Are you very passionate about a subject you can pursue without a formal education?

    2. Is there a job that you want, regardless of compensation, that you can only get if you have an education? Teaching or the medical field would be a good example of this.

    3. Tied to the second, is the return on your investment important to you?

    If you can answer those questions, I think you're well on your way to making a good, informed decision about your personal education.

    Some people don't even know what they want to do with their lives when they begin college. For them, it's a place to explore new ideas and subjects. That, I think, can be invaluable to a person. If that's the case, there's often no reason you shouldn't go to junior college, and maybe get a job on the side.

    That allows you to explore what you ultimately want to do with your life, while keeping one foot grounded in the reality that most people who don't graduate don't have particularly great job prospects.

    Just my two cents,


  • Report this Comment On May 21, 2011, at 8:53 AM, jhparsons wrote:

    I think a huge problem in college costs is that (like health care) it is largely a third-party pay system. Schools have no incentive to keep costs down because consumers generally don't shop on price. Instead the incentive is to create lots of expensive amenities that will attract more students.

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