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Plan Well, Retire Well

Saving and investing your money
college student

College Education: Is it Worth It?


People invest a lot of amount of time, energy and money to earn a college degree. The financial cost of attending college is much larger today than it was a generation ago. It's reasonable to ask, "Is it still worth it to get a college degree?"

Recent reports from Pew Research Center's Social and Demographic Trends project explores this question, and the results are quite intriguing. (Before we go any further, I should point out a bias: I work for University of Illinois Extension and very much support college education. To read the reports, without my interpretation, please go to www.pewsocialtrends.org/topics/college/.)

First, the title of the report "The Rising Cost of Not Going to College" summarizes the findings well. College graduates age 25-32 who work full-time earn about $17,500 more annually than employed high school graduates. In addition, the unemployment rate of 3.8% for young adults (25-32 years) with a Bachelor's degree is much better than the 12.2% unemployment rate for those with only a high school degree. So, yes: college pays. The earning potential is much better for college graduates than high school graduates.

However, many college graduates leave college with student loan debt. 64% of college seniors in Illinois graduated with student loan debt last year. The average amount of debt was $28,028 according to the Project on Student Debt. Does this debt change the financial value of a college degree?

"Young Adults, Student Debt and Economic Well-being," a related report by Pew Research Center's Social and Demographic Trends project, looks at households younger than 40 years old who owe student debt. Currently 37% of U.S. households headed by an adult younger than 40 have some student debt; the median amount is $13,000. As this report explains, young households with student loan debt are falling behind in wealth accumulation. Net worth is the amount we own (assets) minus the amount we owe (liabilities). Households with young, college-educated adults without any student debt have about seven times the typical net worth of households with student debt: median net worth's of $64,700 versus $8,700. Why is there such a difference?

Households with student loan debt are likely to have more car loans and credit card debt. Were people who needed to take on student loan debt to complete college also more likely to need to buy their own car, rather than have their parents purchase their first car for them? Or, are people who are willing to apply for one kind of loan more likely to take on other debt? We can't tell from the data in this report. The surveyed households with debt were about one year younger than the households without debt; this too may have affected the net worth amounts.

The college-educated households were equally as likely to have a home mortgage whether they had student loan debt or not. It may be that some households are taking on too much debt too fast, and that they would be better off financially to pay off student loans more quickly and keep housing costs low.

Interest costs on student loans are relatively high and do add up. By using loan calculators like the ones at Illinois Student Assistance Commission, we can explore different repayment options. For example, if someone has $13,000 in student loan debt at 6.8% and takes 10 years to repay this loan, they will pay $4,953 in interest. If they could pay an additional $100 a month and pay off the loan in 5 years, they would save over $2,500 in interest costs. This $2,500 could be invested and be a positive in their net worth.

A college education does mean a person is more likely to earn more income. However, young adults should be cautious about taking on too much debt overall – whether it's from student loans, car loans, or home mortgages. College students may want to explore online calculators and see just how an extra $2,000 a year in college will add up. Try to keep fixed costs – like rent, car loans, and phone contracts – as low as possible. And, once students have graduated, pay down those student loans as quickly as possible. Another good online tool is "Paying for College."

Education has value beyond its earning potential – the ideas and opportunities on college campuses are exciting! Don't let the financial cost be discouraging but be realistic and aware of the cost of paying back loans.



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