Making sure you are getting a good bang for your buck when it comes to college seems simple in theory, but can be practically difficult to figure out. With the high price of education, it is critical today to make sure you are getting a good return on investment (ROI) with your tuition dollars. Many people subscribe to the view that all student loan debt is good debt because you are investing in yourself. I think “good debt” is a myth, but the view of college as an investment in yourself is a good way to analyze the value of a degree.
How do you determine the value of a degree? Their are two important variables: School and Major. At its most basic level this makes sense. We would expect a Harvard grad to make more money that someone who went to the local art school. We would also expect a Pharmacist to make more than a basket weaving major. Things start to get complicated when we try to put an exact value on education for purposes of deciding whether or not a school or major is worth the debt…
The Georgetown Study
A Georgetown University economist recently completed a major study of the income earning potential calculated by major (editor’s note: the linked file is a large PDF). There were many very valuable findings. One that stands out is that the area you study matters more than the school. The example cited in the study pointed out that if you major in early childhood education, the salary you earn is going to be pretty consistent regardless of whether or not you got an Ivy League degree.
The study went into great detail breaking down salaries by a number of different measures, but the bottom line is that some majors earn far more money than others:
These numbers may be somewhat disturbing… it seems absurd that a social worker makes a third of what a petroleum engineer makes, but that is the reality of today’s economy. People in these two different majors are going to have significantly different experiences on the job market. NPR recently had an interesting interview with a petroleum engineering major and a psychology major. One had a job making $110,000/yr lined up before she even went back to school her senior year, while the other applied to hundreds of jobs just to secure a position that paid less than half.
Why is this important?
The point of this article is not that everyone needs to major in engineering. The point of the article is to have reasonable expectations about what you will be earning when you graduate. This is critical, because you will have to decide if the price of the school is worth the debt that you will be incurring to attend.
Lets say that early childhood education is an area that you really want to study. 36k a year may not be petroleum engineer money, but money is not your first priority in life, and your passion is early childhood education. There is absolutely nothing wrong with making that decision. Now lets say that you get into the private school of your dreams, and you want to attend their amazing early childhood education program. People start to make mistakes when they go into huge debts to fund an education that won’t pay the bills.
Doing the Math
For the sake of discussion, lets assume that you will spend 30k a year for 4 years, meaning your total student loans could be as high as 120k. Now lets assume you have an average interest rate of 10.5% (some have higher, others lower, but this is a good number for our discussion). If you run the math, you will have to pay approximately $1,100 for the next 30 years to pay off this loan.
Here is a calculator to help you do the math based upon your expected college expenses:
If we turn our attention back to the early childhood education major, we have someone who will be making 36k a year but will need to pay 13k a year in student loans alone. Based upon these numbers, this program would not be a good investment for this individual.
How do I decide what is best for me?
If you are trying to pick a major or deciding on what loans you can afford, go to the Georgetown study and look at what each major is paying. Then turn your attention to the calculator and and see how much you will need each month to pay off your student loans. Does your plan add up? Remember, the average salary values are for all graduates, not just the recent ones, so be sure to give yourself a very comfortable cushion in the numbers. If you don’t like the numbers you are seeing, here are a few tricks to save thousands on your college education.
The last thing you want to do is finish school and then find out the hard way that the math doesn’t work.
Readers: Have you done the math on your education? What lessons do you have to offer from your experience?