The Cost of College

With the college and high school graduating season closing out last month there have been several articles on the cost of college, the growing impact of student debt and opinions on whether it is all worth it or not.  As the parent of a college graduate, a college student majoring in accounting entering her fifth year and a high school graduate starting college in the Fall (not to mention one more three years away), the cost of college certainly has and will continue to have a big impact on me personally.

The cost and debt numbers can be scary.  Just 10 years ago only 25% of college students graduated with debt and the average debt was $10,600.  In 2012, the percent of students with debt had risen to 43% and the average debt had nearly doubled to $20,300.  The average family of a college student spends 40% of their annual income on college tuition and the cost increases continue to outpace inflation.  Like healthcare, we keep hearing how it can’t continue this way, but like healthcare it just keeps on going up faster than the rest of inflation.  Not that the degree isn’t worth it.  On average, college graduates make 80% more in their lifetime than high school graduates.  That equates to an average annual return of 15% on the investment in a college education – a return any investor would be very happy to make.

Of course all those numbers are averages and can be very misleading.  Taking on debt for a well paying career would seem to make more sense, then taking on debt for a career that barely pays more than you could earn with a high school degree.  But while you are thinking about what you are going to do with that college education you also have to compare the cost of getting that education.  Comparing college costs is probable the second most difficult and uninformed buying decision American’s make after healthcare (just try getting cost comparison numbers out of that byzantine industry).

While gross cost does usually equate to quality in the area of education, there are two questions that people need to answer.  Is a small increase in quality worth a significant increase in gross cost and what is the net cost because in the end gross cost really doesn’t matter.  Just like no one pays sticker price for a car, practically no one pays the published tuition rates at colleges anymore.  There are loads of scholarships and other non-debt aid that drop the gross cost down.  Comparing the net costs is not easy, but well worth it when making such an important decision. The first question is harder to answer, like so much in life, it doesn’t just come down to the numbers.  Choosing a college involves emotions, lifestyles and legacies and those things do matter, but so do the numbers.  Maybe that is where we can help out our friends and neighbors.  Help them understand the basics of college finance and returns and if the numbers are close then let emotion win out, but if they aren’t they may thank you some day for helping them avoid the costliest mistake of their life.

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