=Intro bookend=

Hi. 

In this video, we will talk about the cost and value of a college education. College is no doubt expensive - but does it provide enough future benefits to make up for the large initial cost? After this lesson, I hope you'll have a better idea of the answer to this complicated question.

=Learning objectives=

After this lesson, I hope you will be able to do the following:

* List main components of the cost of college
* Explain the meaning of opportunity cost
* Describe the statistics on earnings and educational attainment
* Explain the pitfalls of relying on the mean/median

and

* List best practices for maximizing the return on your college education

=Cost of college, example=

Let's talk about the costs of college.

The main components of the explicit cost of college are tuition and fees, which are what the university will charge you for taking classes, and also room and board, which is what the university will charge you for living on its premises, and eating at its dining halls. 

The first component, tuition and fees, is basically unavoidable if you want to take classes. The 'fees' here are basically extra tuition - it's not like you can avoid paying these fees by promising not to use the gym or other facilities. 

Room and board, also known as housing and food, are the next major component. 
Living in university-provided housing is often optional - though at Rowan university in particular it is mandatory for the first two years, unless you are living with your parent or legal guardian, are married, or are over 21 years old. Given the square footage of living space provided, university housing is usually more expensive than off-campus housing in the surrounding area - about 50 to 100% more expensive at Rowan in particular. 
Though there are pluses to living on campus, from a convenience point of view, it is up to you to decide whether that convenience is worth the extra cost. 

University-provided meal plans are more expensive than home cooked food, but are cheaper than the cost of eating out all the time. It will pay big dividends in terms of reduced food costs to be comfortable with food shopping and cooking for yourself, throughout your life. If you are not there yet, stick with the meal plan. 

Additionally, there are some extra ancillary costs, like books and materials, but they are relatively small, running about 1 to 2 thousand per year. We'll just round them down to zero for the purposes of this example, but bear in mind that they do exist.

So, let's consider, what is the net cost of spending 4 years in college. We assume the out of pocket costs of college to be about 25 thousand per year - the actual cost of Rowan university for New Jersey residents in 2015.
Assume also that the average young high school grad makes about 30 thousand per year, and further assume that if you go to college full time, you will not be earning any money.

How does this come out?

=Cost of college, result=

To figure it out, let's consider your net financial position in two parallel universes.
In one, you decide to go to college, in the other, you go to work right after high school.

If you go to college, you are earning nothing, you spend the 13 thousand per year on tuition and fees, and another 12 thousand on living expenses. After 4 years, you are down 100 thousand bucks. Whether you or your parents paid it out of pocket, or you had to borrow it, or some combination thereof, fact remains that you're down 100 thousand bucks relative to where you started at the beginning.

If you go to work, you'll earn 30K per year pre-tax, which translates to about 25K per year after tax. (We will talk about the structure of income taxation in the united states in some future lesson. For now, either take my word for it, or use any number of online after tax income calculators, to verify that 25K is about what you'll get to keep after taxes.) 
You'll still spend 12K per year on living expenses (though in reality, if you live with a roommate like you would in college, and cook your own food, you can actually get away with spending less), so you save about 13 thousand per year. After 4 years, you are up by 52 thousand bucks. 
If you choose to spend the money on some random stuff, rather than save or invest it, or some combination - that's your choice, but the fact remains that you are better off by 52 thousand bucks relative to your starting position.

So, what's the difference in your net positions between the two choices? You are down by 100K with choice 1, and you are up by 52K with choice 2, so, the net cost of doing the college thing is 152 thousand dollars. That's a pretty hefty price tag! You wouldn't buy anything for 152 thousand dollars without thinking about it very thoroughly - and you shouldn't do it with a college degree either.

One important note - the 52K extra dollars you would have earned if you'd gone to work, but didn't because you went to college, is still a cost, even though you didn't give anyone 52K bucks. This is called an "opportunity cost", a cost that you bear by giving up a profitable opportunity, and is very important to not neglect when comparing alternatives.

=Quiz 1=

So let's say you spent 152 thousand. If the going interest rate is 5% per year, how much in annual interest are you giving up by this decision, in addition to the initial spending of 152K?
Take a moment to give it a thought. 

=Quiz 1 result=

 Whether you pay for something by spending money you already had, or by borrowing other people's money, the effective result is the same.
 If you spend your own money, you lose future returns you would have gotten if you still had it.
 If you borrow and spend other people's money, you gain an obligation to pay them the interest.
 In either case or a combination thereof, you are giving up 7600 dollars per year - 5% of 152 thousand.

=Sample bill=

Even if you get most of your costs covered by scholarships and your out of pocket cost is much smaller, as was the case in the example bill we discussed in the earlier lecture, opportunity costs remain significant.

Consider here, than our total out of pocket costs per semester are the loan of 2226, the cash payment of 348, and the credit card payment of 115, adding up to 2689 per semester. Notice that the student is foregoing the full meal plan, so the student refund will probably go towards food, and also books and materials. 
This adds up to only 21.5 thousand for the 8 semesters or 4 years of college, which is much better than the nominal cost of 100K. But once we remember to add in the foregone gains of 52 thousand in opportunity costs, the total cost of college is still a quite significant 71.5 thousand.

So these are the costs of college. They will be more for some people - those who go to more expensive schools, or had better than average career opportunities instead of college, and will be less for others - those who go to cheaper schools, those who live and eat with their parents for free during college rather than incurring room and board fees, or those who had worse than average pre-college earnings prospects. 

All things considered, college is a pretty big ticket item.

Let's now consider the other side of the coin - the benefits of having a college education.

=Good news=

As mentioned earlier, the average high school grad's starting salary is about 30 thousand dollars, which ends up being about 25 thousand after federal and state taxes.
The average college grad's starting salary is 45 thousand, which ends up being about 35 thousand after tax, a net after tax increase of about 10 thousand after-tax dollars per year.

Ignoring interest rates - which is not actually a good thing to ignore, but we'll just ignore them for the moment - it'll take you 15 years to make up for the 152 thousand dollar cost. Quite a while.

There is also a significant difference in unemployment rate. 12.2% of high school grads are unemployed, while only 3.8% of college grads are. The stated salary averages are only for people who actually have a job. If we include in the average those who are unemployed, the after-tax difference increases from 10 thousand to about 12 thousand after-tax dollars. 
Which isn't that much, but it's not all about the average - the probability of a really bad outcome - having no job and no income, goes down by two thirds, from 12 to 4 percent.

Let's take into account interest rates, and assume a relatively conservative 5% interest rate on money, either as debt or as invested assets. In this case, the 152 thousand cost of college that we incur means we are giving up 7600 dollars a year we would have otherwise had - as per our Quiz question earlier. 
This shrinks the future-income margin of having a college degree significantly. While we are gaining 10K after tax, we are giving up 7600 dollars in asset returns, which is maybe 5K after tax, so your net gain in future income is only about 5K per year, assuming you have a job. This extends the payoff time significantly - do the math.

=Averages are misleading=

So, that was a little discouraging. But as this slide title suggests, averages are misleading, since they hide all of the details and different outcomes in one number. Let's take a look at a detailed survey by Payscale, which surveys college graduates from hundreds of universities.

Let's examine the data sorted by early career salary - salary earned by people in roughly the first 10 years in the working world. Think people in their 20s and early 30s. You can see that the "average" of 45 thousand for a college graduate is actually a rather meaningless number. 
If you study some of the top-paying fields, your starting earnings are 60 thousand and up. In these cases, you're not going to have a big problem making up for the cost of college, since your earning potential is significantly higher with your degree than without.
If you major in some of the lowest-paying fields, you'd be making barely anything on top of the average high school grad, and may not ever see a payoff on your college education, if you paid full price.

But there is more to the story than early-career salary. Let's turn our attention to mid-career salary, roughly 20 to 25 years into a career. Think people in their 40s. Mid career salaries tend to be pretty significantly higher than early career salaries, on average about 60 percent more, but ranging from 13 percent to more than 100 percent. 
In contrast, mid-career salaries for people without a college degree are only about 40 thousand a year, a growth of only about 33 percent.

So, in addition to the starting salary bump, whatever that may be, there's also the expanded opportunity for advancement and earnings growth, as a result of a college education. 
This generally increases the probability of eventual payoff, and also reduces the time required to reach it, so that many college career tracks pay off after a couple of decades, even taking into account interest rates.

Still, the fact remains that statistically, 25% of college graduates end up earning less over their lifetime than the average High School graduate. Coupled with the large up-front cost of college, that's not a situation you want to end up in.

=Takeaways=

The main takeaway is that this is a complicated decision, with many variables. It is impossible for me to cover all the options in this video, only to expose the general framework and encourage you to think about it thoroughly.

I would venture to suggest, though, that paying full price to get one of the lower-earning majors, at the bottom of that list, is probably a bad idea financially-speaking. It will likely be several decades, if ever, before you climb out of the financial hole made by a 150 thousand dollar expense. 
If you are firmly set on one of these, you should do everything in your power to reduce the cost via grants and scholarships, to at least have a reasonable chance of getting a positive payoff. Note that I specifically do not include loans here, because this is money you'll have to pay anyway, so they don't actually reduce the long-run cost.
If you are going for a higher-paying major, while reducing your costs is always nice, you'd probably be fine even if you can't get much of a discount on the price tag.

=Choosing your path=

Some common nuggets of advice you often hear are "follow your passion", "go with your gut", "find your calling". 
These sound nice, but statistically speaking, are unlikely to lead to useful insight, or produce particularly good outcomes in terms of either financial success or job and life satisfaction. 

Research shows that people develop a passion for things they spend time getting good at, and that introspectively looking within you to try to find your calling is not nearly as effective, as talking to people who are doing different things, and trying some of those things. 
According to Pew research surveys, one of the most common regrets expressed by people about their approach to college education - at 50% of those polled - is not gaining more work experience before or during college. 

Just as you wouldn't spend 150 thousand dollars on a house without doing serious due diligence, you should not invest that amount into a college education without doing the same. If you are just bumping around in college without a plan, you are failing to take full advantage of one of the biggest ticket items you'll buy in your life.

=Additional reading=

One great starting point to a more rational approach to making the most out of college is the career guide put together by the non-profit called 80000 hours. It's not just about the financial side of things, but about many aspects of careers that impact life satisfaction. I strongly advise you to give that a read. 


=Attributions=