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Education Isn't the Slam Dunk Investment It Used to Be

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At a time when a college education couldn't be more important to U.S. workers, the return on investment for college is becoming frighteningly low. I'm reminded of this cost every month when I see nearly six figures of student loan debt staring me in the face, and for my younger family members, it looks like the numbers are only getting worse.

It hasn't always been this way. From a strict investment standpoint, going to college used to be a no-brainer. Cost was a factor, but state schools offered an affordable way to get a four-year degree and attain the higher salaries that come with it. But over the last 30 years, the cost of college has become prohibitive to many students coming out of high school. For those whose families can't afford to help, the potential hole they can dig has grown cavernous.

The Institute of Education Sciences says that the cost to attend a four-year public school rose 135.3% between 1980 and 2009, after adjusting for inflation. Figures are similar for private schools, as I've shown below. The payback over the same time period has gone down.


Annual Cost of a 4-Year Public Institution

Annual Cost of a 4-Year Private Institution

1980-1981 $6,320 $13,861
2000-2001 $10,609 $21,218
2009-2010 $14,870 $32,475

Source: National Center for Education Statistics.

Media reports often throw around these kinds of figures to show how someone with a bachelor's degree can earn a million more dollars than someone with a high school degree over his or her lifetime. But they rarely talk about college like it is: a financial investment in your future, with both returns and opportunity costs. So I decided to do the math and figure out what the return on an education really is -- and how far it's fallen.

A little Foolish math
Using Institute of Education Sciences data, I've done an investment comparison below. I built a model that began with four years of college, with costs increasing 10% each year. I've assumed that upon graduation, students will earn the average salary cited by the National Center for Education Statistics, with a 3% increase in wages each year. This may underestimate wages at the end of a career, but it overestimates wages at the front end, so I think this is a conservative approximation. Based on this model, I've calculated the return on investment of an education for men and women in the time periods below. As you can see, the ROI for an education has gone down dramatically in the last decade, after actually increasing from 1995 to 2000.


4-Year Public Institution Undergraduate Degree Cost Per Year

Median Annual Earning -- Men

Median Annual Earning -- Women


1995 $9,442 $49,300 $39,400 Men: 30% Women: 28%
2000 $10,609 $56,100 $43,600 Men: 32% Women: 30%
2005 $13,062 $49,400 $41,700 Men: 25% Women: 24%
2009 $14,870 $51,000 $40,100 Men: 24% Women: 21%

Source: National Center for Education Statistics.
Note: Figures are adjusted for inflation. 1995 tuition costs are extrapolated from 1990 and 2000 data.

It's interesting that one of the only reasons the ROI remains this high is because the expected salary for someone with a high school diploma or equivalent has fallen substantially, with a drop of 25% since 1980. Without that drop, the ROI in 2009 would be 12% for men and 17% for women. The drop in high school diploma-level salaries has been 9% in the last decade alone.

What's even more disturbing is when you use the numbers above and calculate the present value of a four-year degree and an ensuing 30-year career, versus working for four years during college. This sort of net-present-value calculation would be one of the first things a finance analyst would do when analyzing an investment opportunity.

I assumed a 10% ROI would be required for making such a sacrifice. My calculations produced a net present value of $122,413 for going to college. A high school graduate's present value of working for those first four years is $111,366, or $11,047 less. In other words, if you required a 10% return on your college investment, it's worth it -- but not by much.

This doesn't tell the whole story
As with any model, the results are only as good as the inputs. These numbers would change using a different discount rate, assuming a higher-paying job, a lower-cost school, or any number of variables. There are also less tangible things like work ethic, network connections, unemployment rates, standard of living, and a host of other factors that are difficult to include in such a model, so the numbers aren't perfect.

What is clear from these numbers is that the return on an education is dramatically lower than it was 10, 20, and especially 30 years ago. It's even gotten so low that I don't blame anyone who questions whether the cost is worth it.

What this all means
This means a couple of things for investors and the country. For American companies, it means that their shortage of highly educated workers may not be improving any time soon. Apple (Nasdaq: AAPL  ) and Caterpillar (NYSE: CAT  ) have complained about a lack of qualified workers as one of the reasons they haven't hired even more workers in America. These two companies are two of the biggest hirers, and if they can't find enough workers with the skills they need, the problem is pretty widespread -- and it could eventually hurt their financial results.

It also means that creating innovative ways to get an education could pay off. Corinthian Colleges (Nasdaq: COCO  ) , DeVry (NYSE: DV  ) , and Apollo Group's (Nasdaq: APOL  ) University of Phoenix all have an opportunity to fill the gap traditional schools are leaving. But the problem is that their online programs aren't always cheaper than their brick-and-mortar alternatives. For instance, when I ran numbers for the University of Phoenix, I came up with annual costs of $14,440 for a finance program, while DeVry's accounting bachelor's program had costs that totaled almost $72,000. That doesn't materially change the cost equation from traditional colleges. If these companies can't find a way to build a low-cost alternative, who can?

Finally, the falling ROI on education means that parents and even students are going to need to save earlier to pay for college, because borrowing enough money to pay for school can bog a person down for a decade or more. For a few ideas on where to start, check out our free report outlining nine stocks that can help secure your future.

The million-dollar question
So what should we do to fix this problem? The President has proposed a number of things that would allow students to borrow more money at lower costs and possibly use federal funding to keep a lid on costs. For now, however, there doesn't seem to be any consensus that a solution is imminent.

I would love to hear your ideas about how to solve this problem.

Fool contributor Travis Hoium is very long student loans, but he does not have a position in any company mentioned in this article. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position on Apple. 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 (21) | Recommend This Article (20)

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 March 14, 2012, at 2:24 PM, Purpleboarder wrote:

    Doesn't this problem sound eerily familiar to the housing bubble? The problem was easy credit/easy 'no document' loans. This drove up the cost of housing, till "POP", many figured out that the 'investment' cost of the house was waaay too much. I think the same thing is happening here. The president is making it even easier to get a gargantuan loan that costs little to service, and just like the shary-Real Estate agent, and salivating while you sign on the dotted line.....So I think that the problem is the low cost debt is driving the cost up (unnecessarily), and the education industry expects and is used to the ever-increasing money flow. Just because you can get money to buy a house/education, doesn't mean you can afford/deserve the house/education. I know this cold-blooded statement will cause debate (for another day) on who 'deserves' to go to college. What am I going to do when my 3 and 6yo get ready for college? I don't know. Maybe the education market will implode like the housing market. If it hasn't by then, it's off to a 2 year school community college, then transfer credits to a state college/university. The money I save will go towards my kids' retirement of first home, or marriage costs (God-willing :o)

  • Report this Comment On March 14, 2012, at 2:57 PM, ejprzybylski wrote:

    So the problem here is the cost of education. How can you decrease costs? Either by increasing the supply of education or decreasing the demand of it. I don't think we could rightly argue that we want to decrease the demand of education, as a more educated society breeds innovation and a higher standard of living, so then we must find ways to increase the supply of education. There's no panacea to increase the supply of education, but you could start at putting exorbitant professor salary and benefits programs and tenure in check at public institutions. This would free up a large number of dollars for either more teachers, or demand less of each tuition dollar for students to spend (as these act as a non-profit). I read an interesting article on the ridiculousness of tenured professor and teacher pay, , and this further convinced me that the problem lies with exceedingly high public sector professor/teacher pay and benefits.

  • Report this Comment On March 14, 2012, at 3:43 PM, Purpleboarder wrote:

    Eip, I agree. The cost is the problem. It's the 'powers that be' that allow this to happen, which gets perpetuated by the ease of getting a loan to foster or legitimize the increased cost of a 4 year school. Administration costs/benefits are bloated and unsustainable. Book costs are the same. (and who sustains these business models?). That's the bigger question. Also the cultural mentality in the USA that "all kids deserve to go to college" is a complete farce. Unless you go into teaching, I'm guessing the typical kid in Arts/Sciences will be joining the Occupy Movement, or the unemployment line, or both....Germany's focus on skilled, non-professional work is something we should emulate. They don't have the dreamy fantasy that all of their precious snowflakes should all get a 4 year college education. What do they do instead? Develope a vocational development training system that prepares kids for the blue-collar workforce; which not coincidentally has built the manufacturing juggernaut of Europe....Here's another idea: offer FREE education to all Math, Engineering, Science majors. Once you land a job post graduation, POOF! Your debt is forgiven. I would think this would keep the Caterpillar's of the US labor force stocked w/ good jobs domestically....

  • Report this Comment On March 14, 2012, at 5:21 PM, SkippyJohnJones wrote:

    @ejprzybylski - thanks for the link! How beautifully written from the perspective of an insider. Both in reading your comment, and especially after reading the link, I am compelled to think that the supply/demand equation is broken because of the massive barriers to entry for four year universities. Once established, there is a virtuous cycle attracting top notch students, professors, and athletes. All of these parties benefit from the education system, and many students choose to give back (as though the education was a gift rather than a purchase).

    The problem is that the only way to get into this positive feedback loop is to offer the perks that establishment institutions offer: tenure, defined benefit retirement plans, premier academic and athletic facilities, student amenities, idyllic greenscapes, etc. The only way to offer all of these things is to charge exorbitant tuition rates, and the only way students can afford the expense is with the easy money that @purpleboarder references. Now we are looking at the inverse, a negative feedback loop of spiraling expenses to feed the beast.

    I know this thinking is oversimplified and reductive, but it is not likely off-base. So maybe the answer is not for the government to subsidize tuition but to incentivize the creation of vastly more colleges. Only with more supply can the cost of education come down. The ideal scenario would involve paying teachers to teach, not academics to do research. If there are 100 applicants for every professorial job, there should be plenty of rejected-yet-qualified teachers who would love the opportunity to get a job that is still better than most. We know from the annually published US News rankings that most schools turn down most students, so there is ample supply on that front as well. If the government subsidized university formation in exchange for guaranteed caps on tuition expenses and professor pay, student debt could be avoided upfront. The cost to the government would likely be neutral, but all involved parties would likely benefit - except perhaps would be tenured professors.

  • Report this Comment On March 14, 2012, at 9:50 PM, ccolemaninc wrote:

    How about also doing a better job of educating our kids on the consequences of having such large debts when they graduate. I was in about my junior year of undergrad when I learned how easy it was to get student loans. Up until then I had been able to get by with Pell grants and a few scholarships. But when I saw how easy it was to get $5K - $10K per year in school loans, I unfortunately kept going to that well...all the way through graduate school. Little did I know that I would be paying for it for a long long time to come, and the effect it would continue to have on my cash flow even when I did graduate and land a good job.

    Had someone educated and counseled me on the long term consequences, I don't think I would have taken near the amount of loans I did.

  • Report this Comment On March 15, 2012, at 11:30 AM, DJDynamicNC wrote:

    "exceedingly high public sector professor/teacher pay and benefits."

    I find that people who make this argument frequently turn around and defend much higher Wall Street CEO bonus pay as being necessary to retain "the best talent."

    If that's the case, then why aren't teachers more highly paid than Wall Street executives? It's hard to imagine that trading fraudulant mortgage derivatives is more valuable to society than educating young people.

  • Report this Comment On March 15, 2012, at 12:27 PM, jpanspac wrote:

    Interesting, but I think you should assume a 40 year career, rather than 30 years.

  • Report this Comment On March 15, 2012, at 12:30 PM, 48ozhalfgallons wrote:

    I can't help but be cynical about college ROI. I put myself through tossing papers and working summers @ $1.25 and hour. Tuition at the university was $115 per semester. Graduation rate 15%. It was the Vietnam era. Professors constantly complained about being under paid and having to publish or perish. Talented graduates therefore pursued careers in the private sector. Employers of that era regarded the applicant pool as well educated and trainable. Executive pay was about 25X entry salary.

    Fast forward... today, executive pay = 100+ times entry salary; talented graduates pursue public or banking careers; manufacturers complain that there is a lack of qualified applicants. Duh! The reality is that corporations have delegated higher education to do their training for them and the result in the eyes of employers is a surplus of educated but unqualified workers. A university degree was never intended to replace trade schools, yet trade school graduates are spurned by corporations.

    I'm retired and out of debt; never earned more than 30 grand. A couple of my friends pursued the trades. They have retired comparatively rich, though not as rich as those who pursued careers in the public sector drawing 180% of their top earning years from accruing cost of living increases for the past 22 years. I began with a Dow 30 company bent on meeting Affirmative Action quotas. Enough said.

    Four years @ 60 grand plus living expenses will most likely waste your time today unless you get a ride. There is no distinction in a four year degree and 50 -100 grand of debt.

    When employers' bottom lines suffer enough despite complaining about lack of qualified applicants, the surviving employers will have established apprenticeship career paths for promising young people. Wages will reflect the full development of an employer trained apprentice rather than the presumed value of an irrelevant degree. The employee's mission for himself is to ensure his skills remain in demand across societal needs.

  • Report this Comment On March 15, 2012, at 3:23 PM, 48ozhalfgallons wrote:

    Thanks, ejprzybylski for the link to the fascinating truth which I read after I posted the above.

  • Report this Comment On March 15, 2012, at 4:58 PM, TMFLouis wrote:

    A point that you forget to include is the cost of re-education or returning to school later in life due to a career change. The days of ending your education when you graduate is long gone.

  • Report this Comment On March 15, 2012, at 5:22 PM, XMFRosetint wrote:

    Interesting point. That's one of the big reasons I quit college after about half a semester, but the discount rate I used was much higher than that due to the bargains I found in the market at the time.

    I've done "alright" so far, with no debt and plenty of cash/securities saved up.

    I think a lot of it probably depends on what a person studies, as well. I'd wager someone in engineering makes more than someone in women's studies, for instance.

  • Report this Comment On March 15, 2012, at 5:42 PM, DJDynamicNC wrote:

    I dropped after a couple of years when it became unaffordable and my only regret is that I bothered going in the first place and had to pay off that $12,000.

    I was studying English with the intent to become a writer. Now I'm an actual freelance writer and, coupled with my other revenue streams, I'm making enough money that I'm close to my maximum wage cap and will probably hit it in the next year or two.

    In other words, I achieved my goals despite college, not because of it.

    I rarely recommend a college education to people these days.

  • Report this Comment On March 15, 2012, at 5:48 PM, LegalizeMe wrote:

    The cost of tuition is only part of the problem.

    Another problem is that people take out more student loans then they need. If tuition is 3k a semester then borrow ONLY 3k. Don't get all that extra money they say you need for a laptop, rent, food, etc. Get a job to pay for everything else.

    I worked full time through college (racked up 37k in student loans) and the day I graduated I had 20k saved up to apply towards the principal. My degree doubled my salary from 25k to 50k and I paid off the remaining 17k in two years.

    Let's be honest. People who are bad with money are bad when it comes to student loans. I know a lot of people who are bad with money so the fact so many are drowning in student loans doesn't surprise me at all.

  • Report this Comment On March 15, 2012, at 6:38 PM, ejclason2 wrote:

    I'm neither a Professor, nor have a PhD. But I have a friend who has a PhD in Computer Science, and was a Professor, with tenure, at a prestigious University. He felt he was doing pretty well, until Microsoft offered a whole lot more money and benefits.

    So to those who want to cut salaries/benefits for Professors, you not going to be able to attract enough people with technical PhDs.

  • Report this Comment On March 15, 2012, at 6:55 PM, TMFFlushDraw wrote:

    Thanks for all of the great comments everyone. It's a tough topic to cover because there are so many moving parts, but you've made some very valuable points.

    I don't have an answer to costs, and I wish there was a silver bullet. I always wondered where all of my money went. In MBA school about 2 students tuition paid the teacher's salary (adjunct). Where the money for the other 43 went... I have no idea.

    Travis Hoium

  • Report this Comment On March 15, 2012, at 9:04 PM, TMFDarwood11 wrote:

    First, it's extremely dangerous to one's financial health to assume that "getting a college degree" which is "any college degree" will be worth the cost of admission.

    Your article mentions a "30 year" working career. You are so, so, wrong! I think it's realistic to assume that one will be required to work until 65 to meet their financial goals. That's a 40 year horizon for someone getting out of college at 25.

    I always coached my children to consider a career spanning 40 years. I also coached them to consider a career that would not only "pay the bills" but would also allow them to make a contribution to society. I wasn't promoting a self serving career in politics!

    I am not surprised that so many have discovered their college degrees to be worthless. A college degree is a tool which is to last a lifetime. Tools are only as useful and the person welding them.

    BTW, the children decided to pursue careers in engineering. They are gainfully employed.

    Of course, government policies may change that. Here in Chicago, about 18 years ago, "Hizzonner" Mayor Daley proclaimed "We don't need manufacturing." He decided to get on board the "great service economy express" as did so many other politicians, from President Clinton on down.

    So we can now get advanced degrees and work at Wal-Mart. Sad to say, the "greeters" have been eliminated; I was looking forward to being the "greeter from hell" in my retirement. I guess I'll just have to continue working and making a small difference in my field of endeavor (this is my 49th year of making a difference and paying taxes).

    I suggest that anyone considering a degree in anything, also consider a lifetime in fulfilling the career that education prepared them for. I also suggest that they consider how that education will prepare them to earn a living to pay for those school loans, live a reasonable live, and save for the retirement that they expect to achieve.

  • Report this Comment On March 16, 2012, at 8:30 AM, rtichy wrote:

    Which figures did you use for in-state tuition costs? The student-family cost or the loaded cost with the subsidies from the state(s)?

    I think it is worth asking whether the lower, subsidized cost of state schools weren't doing a good job of keeping a lid on private school tuition. As the states removed the subsidies, in-state tuition has risen quickly, and private tuition has risen faster, too.

    If you think that it was "unfair" for states to subsidize tuition, then consider this article from the nytimes:

    Education still has a greater return to the overall economy than anything else, is the gist of the article.

  • Report this Comment On March 16, 2012, at 10:35 AM, cahunter wrote:

    It's not uncommon to pay $40,000 or more per year, based off what I see my friends paying right now. I wonder if it wouldn't be better to take some business and accounting classes at the community college and use the remaining money to start your own business or to invest. Most degree's are a joke offering very little return on investment, and if you don't believe it, ask around and see how many people are working in the field that they went to college for. I don't have an answer for rising costs, college is a business and business is good - plenty of customers. Until people walk away I don't see costs going down. Offering lower rate loans is not the answer, as many people have mentioned it just entices people to take on greater debt. It seems that there is an awful lot of grant and scholarship money, but only select people are able to get their hands on it. If you grow up middle class as I did I didn't qualify for anything. Maybe all that money should be spread out to help lower costs, and even the playing field for everyone.

  • Report this Comment On March 17, 2012, at 11:19 PM, TMFDarwood11 wrote:


    There are some colleges which offer co-op programs, in which the student works a semester, goes to school a semester and then works the next semester, and so on. The summer session, which is short, may be considered by the college to be a "semester" and requires some planning with the counselor to make it work

    The advantages are:

    1) Get actual work experience in the field and discipline.

    2) Get paid for that work experience.

    3) Get possible "work" credits for the time spent while working while getting that degree.

    One of my children was "convinced" to go this route. After initial resistance, they made the decision to go that route. The bottom line? They decided they actually enjoyed working in their field, they were paid at an annual rate of about $48K for the privilege of working and, 3) On graduation, they were offered a higher base salary because they were given work credit for the time spent "working" while in college.

    That particular son has a degree in nuclear engineering and is quite happy with his decisions, and his purpose in life.

  • Report this Comment On March 18, 2012, at 1:54 AM, pawson wrote:

    Travis - I agree with the approach and think this is something that absolutely needs to be looked at from an ROI perspective. That said, I think there's an oversimplification that often creeps into these analyses. Mainly - not all college degrees are the same. Someone who is either financially motivated or financially savvy (and certainly someone rationally comparing NPVs of college vs. no college would fit this mold) has the ability to choose a field of study with higher salaries and better employment prospects. (e.g. engineering, medicine, law, accounting, business, etc.) For someone inclined towards one of those professions and with the ability to succeed in one of those academic programs, I'd bet that education is a no-brainer. The problem is that the math gets dragged down by less marketable majors (most of the liberal arts, for example) which cost about the same to study but deliver much less in salary prospects at the other end. For example - 2009 Labor Dept stats for BS Engineers range from an average starting salary of $52,000 for a Civil Engineer at the low end up to $83,000 for Petroleum Engineer. The spread between getting out of school with a starting salary of $51k (in your analysis) vs. $83k completely obliterates the conclusion.

  • Report this Comment On March 18, 2012, at 1:05 PM, StefanStackhouse wrote:

    Excapt for those few very bright students who can really benefit from four+ years at an elite institution, most families need to be thinking about keeping the cost of higher education as low as possible. There are multiple options available, including:

    * AP courses while still in high school;

    *The local community college to get most of their general education requirements out of the way (while saving money by still living at home, and with flexible course schedules that might make it possible to work part time);

    *Credit by examination;

    *Online courses (look for individual courses from accredited institutions rather than entire programs);

    *Completion of upper-level coursework at the nearest campus of a public university, commuting from home if cost-effective;

    *Buckling down, ignoring the distractions, and plowing through in seven or six semesters instead of eight.

    Students applying most of these strategies should be able to complete a four-year degree for far less than that $56K+ ($14K+ x 4) indicated in the article - maybe even for as little as half of that amount, or even less. That would definitely improve the ROI, and might even make it possible for a lot of families to swing it without resort to much or any student loans, especially if the parents were good about putting savings consistently into a 529 plan.

    A couple more things: what the student studies does matter. Be cautious about a major that is going to require commitment to grad school in order to have any chance of landing any decent job opportunities at all. It might be worth eventually going back to grad school, but you want to have the option of going directly to work after getting your bachelor's degree if your situation requires it. Obviously, some majors are more employable than others. I would also recommend that students look for opportunities to fill their intellectual tool box with practical skills, including things that may not be part of the minimum requirements for their major, but that might come in handy some day, especially if they find themselves needing to change careers some day. Strengthen your writing and verbal communications skills, learn a foreign language, master as much math as you can, become facile with computers, learn a little accounting, etc. You never know when these things may come in handy.

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