Financial costs and benefits of college

If you turn on the news, you may hear a debate raging over the value of a college education in the United States. In fact, many have begun to question whether going to a 4-year college* to get a bachelor’s degree is still worth it given the rising cost of tuition and uncertain job market that awaits newly minted college graduates.  Putting aside the numerous intangible benefits of college for a moment, let’s address the question from a purely economic perspective. Is going to a 4-year college a good investment?

At first glance, going to college can seem like a financial impossibility for many Americans. Over the past 40 years, the average price of college has more than doubled when taking inflation into account. The average public 4-year school now lists their total cost of attendance (which means tuition, room, and board) at nearly $20,000 year. The price of private colleges is listed even higher, with an average cost of attendance above $40,000/year:

Fortunately, the listed cost of college – sometimes referred to as the “sticker price” – can be deceiving. Aid from the federal government can substantially decrease the out-of-pocket cost that you pay for college based on your family’s financial need. In 2014, for instance, the federal government offered nearly $24 billion dollars in grant aid – grants that don’t have to be paid back – to college students who had need, in addition to disbursing around $100 billion dollars in low-interest government loans with flexible payback options[i].  On top of government grants, there is also private aid – both from individual colleges and private scholarship granting organizations – which can reduce the actual cost of attendance even further.

Some argue that continuing to college means giving up the chance to get a job immediately out of high school and begin earning money. This is certainly true; however, the delay in earning can pay off. The average 4-year bachelor’s degree holder, for instance, earns nearly $1 million dollars more over the course of their lifetime than someone who holds only a high school diploma:

If there really is substantial financial aid available for higher education, and the payoff can be so high, then what is the debate about? Like most complex issues, it’s important to move past generalities. You are not an average; you are an individual who will make specific decisions regarding college that will make the cost vs. benefit equation more or less attractive. The most important of these factors relate to your choice of college, your choice of major, and your persistence in graduating.

There are nearly 3,000 4-year colleges in the United States, and each has its own approach to determining how much assistance to offer to students with financial need (often referred to as need-based aid) [ii].  As a general rule of thumb, the colleges that offer the best need-based aid are the colleges that are the most selective public and private institutions in the country.  This may initially seem like a paradox. Why would many of the nation’s best colleges – colleges that receive so many applications that they could easily fill every seat with students whose families could pay full price – choose to offer the best financial assistance? First, it’s because these colleges believe that your long-term potential for success has little to do with your family’s present income, and by extension, your family’s income should have little to do with whether you can attend college. Second, it’s because these colleges have substantial sums of money that they have raised over the years, and these funds allow them to put their beliefs about your potential into action by offering financial assistance if you need it.

Let’s take Stanford University as an example, a highly selective university where the total cost of attendance was listed at $62,801 for the 2014-2015 school year.  For many families, this may seem completely out of reach. However, the university actually offers substantial assistance to ensure that finances do not keep you from attending. For instance, families of students who make less than $60,000 per year and have typical assets are expected to contribute $0 for a student's tuition, room and board, books, etc. Similarly, students whose families make between $60,000 and $100,000 receive scholarships to cover the entire cost of tuition. These generous financial aid policies are one reason that schools like Stanford see such a high percentage (95%) of their students graduate – the payoff of going to college – with an average of only $15,000 in total federal loan debt [iii].

Does this mean that you must go to Stanford or some other highly selective institution to make college economically worth it? Absolutely not. There are many tremendous colleges – public and private, local and national – where students take on a manageable amount of loans and graduate in high numbers. What it does mean, however, is that not every college's financial aid program is created equal - and you will need to do your homework to understand the true cost of attending a particular institution (a topic discussed in depth later in this resource!).

Another decision that will impact the financial benefit of college attendance is your choice of major. A major is a specialization in your studies that is typically chosen by the start of your junior year (if not earlier), and different majors lead to different career paths and subsequently different income levels. For instance, the average engineering major earns significantly more than many other majors over the course of their career:

Earning potential certainly isn’t the only criteria for choosing a major, nor is it necessarily the most important – after all, if you choose something you hate, you probably won’t be very good at it! However, you should be aware up front that your choice of major in college will impact the economic value of your degree. In addition, finding one's first job(s) can be substantially more difficult with some majors than with others.

So far, we’ve been exploring the costs and benefits of a 4-year college degree. What we’ve left unsaid: some students go to college and never finish. Students who drop out of college have substantially lower earnings, higher unemployment, and greater likelihood of defaulting on their debt than students who ultimately graduate:

This brings us to perhaps the most important point about the economics of higher education. While college can offer a tremendous boost in income relative to cost, these financial benefits overwhelmingly go to students who finish their 4-year degrees rather than those who start the college journey but do not persist.

We began by asking the question of whether a 4-year college is a good investment.

Certainly, college isn't for everyone. Some students aspire to careers that simply do not require a 4-year degree. If you want to become an electrician, for instance, you may be much better served in a vocational school or apprenticeship program than at a traditional 4-year college.

Even for those who do desire a career that requires a 4-year degree, there are important decisions to be made to ensure the benefits of college outweigh the costs. From finding a college that offers sufficient financial aid to choosing a major and ultimately persisting through graduation, the value of higher education will be determined in large part based on the choices you make.

Yet, if you proceed cautiously, the answer to the question around the economic benefits of college is definitive.  Financial aid can make it affordable to attend, and as a graduate you can earn far more over the course of your career. In short, yes - college can be one of the very best investments that you make.

*We will add information on 2-year degrees and how community college may factor into college planning at a later time - at present, our college information primarily relates to 4-year colleges.

[i] http://febp.newamerica.net/background-analysis/federal-higher-education-programs-overview

[ii] http://nces.ed.gov/fastfacts/display.asp?id=84

[iii] https://college.harvard.edu/financial-aid/how-aid-works/fact-sheet