Friday, April 18, 2014

Investing In Education

The other day I was fulfilling my guilty pleasure of reading the comments section of online news articles. The article I was reading about involved the growing cost of a college education and the subsequent bubble of student loan debt that is hanging over the country, to the tune of something in the ball park of $1,000,000,000,000.00 (That’s $1 trillion, but typing out all those zeros in much more dramatic). 
The loan debt could buy these ten companies, and there would still be $350 Billion left, enough to give every person in America over $1100. 
If you are a connoisseur of comment sections, as I adjudge myself to be, then you have undoubtedly come across a comment such as, and I am paraphrasing here, "if you want to go to college, you should get a job, save money and pay for it...blah blah blah...that's what I did with my house. Kids these days just want everything handed to them...blah blah...entitlement..." I stretched that out far longer than need be, but the point is in there. Apparently, going to college should be something you save up for and when you can afford it you go.
Where I go to observe the depths of human depravity. 
People have a general disdain for debt, somehow disregarding the amazing societal advancement that credit was and continues to be. I, however, do not possess this disdain, I see the general benefit of using credit, and in some cases, as I will lay out in this writing, it actual is the far more logical choice. So onward we go into a world of numbers, because where else would you expect a rant about the economic reality of a college education to lead.

We are going to go a little Memento here for a second and start at the end. The average college graduate, and all statistics henceforth will be averages for the United States unless otherwise noted, will earn one and a half times as much as an individual with just a high school diploma. The raw numbers work out to be yearly earnings of $29,950 for high school graduates, and $44,970 for those with a bachelor's degree. For this chance to make what seems like substantially more, the average college grad will leave school with $29,400 in student loan debt. 
Seriously this movie is too good!
Now, I know you've heard all these numbers before, and you'd be hard pressed to find someone to argue against you that, other than anomalous cases, college grads make less than those who choose to forgo furthering their education. And it's difficult to imagine someone not being aware of the ballooning student loan debt, but the question we are asking, which most writers would throw in their opening paragraph, but which I have decided to shove here somewhere in the middle, is, "does it make sense to save for college by going into the work force over taking out student loans?" or more concisely, "Are students loans worth it?"


So, Are Students loans worth it?

I had to pull apart a couple data sets to get to something I felt I could work with to answer this question, and here are the question I posed in order to accumulate the data needed to address our primary query:

How much more money is a bachelors degree worth versus a high school diploma?
We answered this above, something to the tune of $15,000. Rounding numbers is going to make the math easier in the end, but the raw number is $15,020, so the rounding was minimal. 

How much does a bachelors degree cost?
Again addressed above, $29,400. Yes, the degree costs more than that, but we are attempting to look at the investment, so we are conveniently ignoring the extraneous costs not factored into the loan debt. 

Now for some new questions.

How much can one save?
To do this I assumed first that our individual was a single adult, and that our diploma wielding individual scored a job making roughly $29,905 per annum, as the average high school diploma wielding individual does. 

It was difficult to circumvent the idea of what a "living wage" is in the United States. To elaborate, Mississipi, which has the lowest cost of living of any state, one would require an income of $17,581, while in Hawaii the same individual would require an income of $26,022. If we want to ignore the variable of Hawaii being an island in the middle of a vast ocean, thus increasing it's cost significantly, we still find in the contiguous states that New York State requires $23,929. So I had to come up with a number that was somehow more encompassing than just picking a state at random. I choose Pennsylvania, not because that is where I am from, but becomes Pennsylvania runs as close to the median as any state, with a required annual income of $18,032. I'm throwing together two data sets to pull out my data, so there is a slight discrepancy, but 18 States fall within the strata from $18,000-$19,000
Composite Cost of Living (Scaled)Annual Average 2013
Now we know that one needs $18,000 to survive, and with just a high school diploma will pull in $29,950 a year, which for lazy math we will round to $30,000, he got a $50 year end bonus let's say. Leaving our hypothetical individual with $12,000 a year to sock away for his future college degree. 

So in order to have enough saved he is going to have to work for two and a half years, which conveniently gives us $30,000 or just enough to not need that aforementioned $29,400 loan, and he can throw a "I'm going to college" party with the remainder. 

So what if our hypothetical individual would have started school immediately and graduated with that debt?

Applying the average bachelors earnings we have him earning $44,970 per year, or $45,000 for our purposes. We assume the same required cost for living expenses, $18,000 and find our individual paying off his student loans at $27,000 a year. Our college graduate has paid off his loans in just 14 months! A whole 16 months quicker than our guy who saved for college...Well sort of...

We forgot to add in the interest for the student loans. Student loan interest is capped at 8.25 percent, which is the number we are going to use, although many people pay significantly lower rates. So if we run back to our calculators we find out that in order to pay off the $30,000 loan at $2250 per month ($27,000 divided by 12 months)...

we get...


Loan Calculator
Loan Balance:$30,000.00
Adjusted Loan Balance:$30,000.00
Loan Interest Rate:8.25%
Loan Fees:0.00%
Loan Term:1.3 years
Minimum Payment:$2,250.00
Enrollment Status:In Repayment
Degree Program:Bachelor's Degree

Monthly Loan Payment:$2,250.00
Number of Payments:15

Cumulative Payments:$31,573.54
Total Interest Paid:$1,573.54

Note: The monthly loan payment was calculated at $367.96 for 120 payments (10 years). Since this amount is less than the $2250 minimum, the term of the loan has beenshortened to 14 payments of $2250 plus a final payment of $73.54 .

So our hypothetical college graduate ended up paying a tiny payment of $73.54 in the 15th month, which still means it took him half the time to pay his loan as it did for high school diploma to save for his. 

Now I see the argument brewing out there, "Yes, but her paid an extra $1,573.54 in interest!"

This is true. Now we are going to make the assumption both of these individuals start their pursuits at 18, and that each took four years to acquire his bachelors. This would mean high school diploma didn't finish college till he was 24.5, but he graduated with no debt. College Graduate, the one who took out the loans, graduated at 22, with $30,000 in debt but paid it off in 15 months, making him 23.25 years old, with a bachelors and debt free. 

His extra income for that 1.25 years? 
$18,775. He paid $1,573.54 in interest,which leaves him with an excess $17,201.46 over his peer who decided to save for college, both aged 24 both with completed degrees. 

I am aware a lot of assumptions were made here, first and foremost I gave both individuals the average salary for individuals at their education level, which is not reflective of starting salaries. I also assumed they both possessed self control to put aside all the money, or use it to pay loans, not required to survive. 

However, the overwhelming majority of data, in fact I've found nothing to the contrary, says that a college education is worth it. It will pay for itself in time in most cases, and the anomalous few that dispute this can be written off as just that, anomalous. 

So are student loans worth it?

I think we have proven they are. Although it is clear the system needs addressing, that something needs to change to avert what looks like a clear finical disaster looming over our collective heads. And you know what this got me thinking...

Are cars loans worth it?

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