John Lounsbury's  Instablog

 Jack Hough, writing for Smart Money, addresses this question.  He has the following graph, showing how much more the average college graduate makes per year vs. the average high school student.

Hough then describes two case studies which compare lifetime savings of the average high school graduate with those of the average college graduate.  The parameters include:

*  5% savings rate for both.

*  The same investment return on savings for both.

*  The same amount of money available for college at age 18 for both subjects.

The case study parameters can be criticized on several counts, but other case studies with different parameters can always be run by those who want to view circumstances that might be closer to them personally.

Some of the things in the case studies that may not be typical of common circumstances include:

*  The existance of significant savings in the student's name at high school graduation (in this study, $16,594).

*  The same savings rate for the lower income high school graduate (5%).

*  Investment returns of 8% (after tax and tax deferred).

*  The higher risk of periods of unemployment for the high school graduate.

*  The higher risk of occupational disability for the high school graduate.

With all those considerations in mind, here is the savings graph from Hough:

This discussion reminds me of a conversation I had with my father as a high school senior.  My father, at that time, was a dairy farmer and seed grower, with an Ivy League Ph.D. in economics, and 24 years of university teaching experience.  His final teaching position had been back in an Ivy League university.

My father asked me why I wanted to go to college.  My answer, essentially, was that I wanted to make money.  His rejolnder was that I did not have a valid reason.  Making money was not a good reason to go to college, he told me.  If I wanted to make money, he would make me an offer.  Instead of going to college, he would offer me free room and board for four years if I agreed to work full time and do with the money earned exactly what he would tell me to do.  In addition, he would give me, each year, the money that would have been spent on the state university tuition.  That also had to be used exactly as he would instruct me.

I did not seriously consider my father's offer and went to college.  He paid my tuition at the state university and I worked to pay all other expenses.  However, the conversation did cause me to reconsider the reason I went to college.  Before I even arrived for freshman orientation, I had come to the conclusion that the reason I wanted to do that included greater range of opportunities and a richer life intellectually, in addition to the expectation of higher earning power.  My father, without being overly didactic, had started me well on my life journey.

I have not regretted my decision to go to college, although I can run a number of hypotheticals about how much wealth I might have acquired following my father's advice and mentoring.  My life has encompassed a wide variety of endeavors, both corporate and entrepreneurial.  My financial condition is satisfactory, although not wealthy; I am still working and loving it, long after many have retired.  I have a large family (three children, four stepchildren and 17 grandchildren) and am a physically active (skiing, hiking and non-technical mountaineering) and intellectually involved.  I have difficulty imagining a better outcome.

This afternoon, I ran a hypothetical of what my father might have directed me to do.  If he had had me invest is stocks, I have picked eight stocks, one for each of the eight years after I graduated from college and starting the year before I got engaged in the life path I chose to follow.  I believe I have a good idea of stocks my father would have favored, but the stocks selected are based only on presumption, not on any specific information he imparted to me.  The hypothetical is shown in the following table.

Of course, in real life I probably would have made portfolio changes over the years.  I would hope so anyway, particluarly if I had invested during that time in companies like General Motors, Bear Stearns or Lehman Brothers.

Coming back to the Hough article, the case studies presented, while certainly not realistic in detail for most individuals, are clearly correct in pointing out the negative effects of the time value of money on lifetime personal wealth (in the balance sheet sense).  These negative effects of the time value of money derive from the life style choices made by many Americans, including going to college.  In making the decision to go to college, personal quality of life, including intellectual quality, must be an important part of the equation.  On purely economic terms, attending college is a suspect decision.

However, if one's life goal is a profession, such as medicine, the law or teaching, a college education (and post-graduate in many cases) is a necessity.  Then you will be interested in the discussion Mr. Hough offers about the current shortcomings of higher education in terms of quality of the product.

Some thought provoking statements from the article are:

Degrees are poor proof of learning.

Literacy levels among college graduates, the commission noted, fell sharply over the 12 years ending in 2003. (Spellings Commission)

The system must change before students are made poorer, society grows less equal, the bright are left ignorant and "college" comes to mean a four-year pajama party intruded upon by the occasional group discussion on gender studies.

The four-year college degree has come to cost too much and prove too little. It's now a bad deal for the average student, family, employer, professor and taxpayer.

...bright citizens spend their lives not knowing the things they ought to know, because they've been granted liberal-arts degrees for something far short of a liberal-arts education.

Read the entire article (with links to related articles about higher education) here.