Is College Really Worth It?

08/04/2008 12:00 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

Is college worth it?  It's heresy to ask that question! 

Everyone agrees our country needs a well-educated, well-trained workforce.  For three generations it has been an unspoken national policy that our high school students must go on to college-for their own good, and for the good of the rest of us.

We've documented the value of a college degree.  And we've created a multibillion-dollar federally sponsored student loan program to reinforce our collective belief that college is a "must."  

A US Census Bureau report issued in October 2006 gave us the latest facts:

  • Adults age 18 and older with a bachelor's degree earned an average of $51,554 in 2004
  • Those with only a high school diploma earned only $28,645
  • Those without a high school diploma earned $19,169
  • Advanced-degree holders made an average of $78,093

It's clear that education translates into higher earnings.  So, case closed?

But wait a minute: These statistics don't account for the fact that a starting job after college graduation is likely to pay far less than the "average" college grad earns.  Those averages include executives who graduated years ago, and are now earning top salaries.  But many recent grads must settle for relatively low-paid starting jobs.

Meanwhile, the burden of student loan debt weighs most heavily on recent grads.  Many of them take out those subsidized federal Stafford loans, and are faced with repayment plans within six months of graduation-some before they even land a job.

And these days, paying for college is translating into higher debt.  The average debt burden for a college graduate has soared by 50%, according to the Project on Student Debt LINK (www.projectonstudentdebt.org).   The "average" debt is reported to be $21,000-but many graduates owe $65,000 or more. 

Then, repayment starts, and interests costs add up.

Consider the real costs of repaying a student loan: A borrower who takes 30 years to pay off a $20,000 loan at 6.8% will pay about $27,000 in interest. That compares with $7,619 on a loan paid off in ten years.

So, even in the best possible scenario, our college grad will have to divert nearly $28,000 of after-tax earnings to paying down student loan debt in the first ten years!

Plus, student loans now carry a fixed rate of 6.8% for the life of the loan, and you can't get out of repaying it by declaring bankruptcy.

Meanwhile, starting salaries for newly minted grads are not keeping up.  The Project's report on the class of 2006 indicates that the average student loan debt for graduating seniors climbed by 8% in one year, while starting salaries rose by only 4%. And that was before we entered the current period of tough economic times.

So, let's go back to that original question:  is a college education worth it?

My answer is a resounding "no"-with an important caveat.  No, it's not worth going into a lifetime of debt, or ruining your parents' retirement plans, or putting their home on the line with a floating-rate home equity loan.

College is worth it, though, if you re-think your entire plan.  It's time to consider community college for the first two years and the cost savings of living at home.  It's time to reconsider night or weekend degree programs while you work.  It's time to look into online degrees, from accredited institutions.

And while you're reconsidering your plans, the free market might make its own adjustments.  College costs have risen at twice the rate of ordinary inflation-because parents and kids were willing to go into debt to pay for it.

But when the backlash against high college costs takes hold, you can be sure that colleges will start to part with more of their rich endowments in the form of grants and scholarships.  (Elite institutions like Yale, Princeton, Stanford, and Swarthmore are doing this already.)

And they'll figure out a way to fire tenured but non-teaching professors.  And they'll start cutting frivolous courses.  And maybe they'll even cut funding for school sports teams.

They'll do all that and more if they want to fill their classrooms-just as the fast-food chains cut prices and create value meals, just as Wal-Mart cuts prices, just as car dealers offer incentives.  In a free market, you can only charge high prices if there are willing buyers.

That's why I'm betting that over the next few years, many "buyers" of a college education will think twice about the high price tag and the long-term costs of borrowing.

What do you think? Have your say now.

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