Question of the Day: What is Value of A College Education?

Sep 03, 2014

Great opener to a discussion of the value of a college education!  A recent report from the Federal Reserve has the answer and provides a great opportunity to introduce some new concepts and hone your students analytical skills.  

“Not so long ago, people rarely questioned the value of a college degree. A bachelor’s degree was seen as a surefire ticket to a career-oriented, good-paying job. Today, however, many people are uncertain whether going to college is such a wise decision. It’s easy to see why. Tuition costs have been rising considerably faster than inflation, student debt is mounting, wages for college graduates have been falling, and recent college graduates have been struggling to find good jobs. These trends might lead one to believe that college is no longer a good investment. But when you dig into the data, is this really true? This week, we examine the value of a college degree in a four-part blog series. In this first post, we do the basic math and show that despite what appears to be a set of alarming trends, the value of a bachelor’s degree for the average graduate has held near its all-time high of about $300,000 for more than a decade.”

Here are some key concepts to highlight in their report:  

  • Net present value:  a dollar today is worth more than a dollar in the future.  So, college costs weigh heavily since they are in the near future while the value of earnings will decline further out in the future, assuming they don’t increase at the same 5% rate that future cash flows are being discounted.
  • College wage premium:  how much more does a college graduate make compared to those with just a high school degree.  Is this premium growing or shrinking?  Why?
  • Interpreting data:  
    • Is value of college education increasing or decreasing based on the chart?  Why?
    • How long does it take to recoup the cost of college?  Is this trend increasing or decreasing?  Why?
  • Remember that this data reflects averages and highlight key disclaimer in their report:  “While our estimates make it seem like college always pays handsomely, that may not always be the case for everyone.”
    • What do you think you as a future college student can do to increase the value of your college education?  

Bonus:  What questions would you have for the authors after reading their research?  

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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