Have you heard about the rising cost of higher education? Of course you have.
Some time ago, then-secretary of education, William Bennett, hypothesized that federal funding of student loans would lead to a significant increase in college tuitions. The Bennett Hypothesis, as this is now known, has been researched considerably since then and has yielded mixed results.
What isn’t mixed, though, is the fact that the cost of higher education has increased significantly in the decades since Bennett outlined his thoughts. Some reports place the increase since 1985 as high as 500%. Much less empirical is my experience that I could pay for a bachelor’s degree in business at the University of Wisconsin - Madison by working as a server and bartender at a Ground Round — something simply not possible today (and not just because Ground Round locations have disappeared).
But is it still worth it? The answer remains an emphatic yes.
According to research, in 1985 the income ratio of college graduates to high school graduates was about 1.1 to 1. If the high school graduate earned $20,000, the college grad would earn $22,000 on average.
What is your guess on that ratio today?
Well, it too has grown dramatically to about 1.8 to 1. Over his or her lifetime, a high school graduate can expect to earn about $1.2 million, according to the U.S. Census Bureau, while the college graduate can expect to earn about $2.1 million — a $900,000 difference!
And the higher the attained education level, the greater the financial rewards. A graduate with a master’s can expect to earn $2.2 million more than the high school graduate, while a PhD grad can expect to earn $3.2 million more than a high school grad (I guess I better get working on my dissertation).
I am certain — at least I hope — that the students in my finance course are asking about the present value of all of those numbers. (With a couple of assumptions that a $900,000 difference between a bachelor’s graduate and a high school graduate is worth about $380,000 on average today.) The present value of the cost of college is about $100,000. With a difference today of $280,000, a college degree is worth the investment.
William Bennett may have been right about rising tuition rates, but you have to consider the return on your investment, not just the investment itself.
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