College Degrees a Better Investment Than Stocks, Bonds

NEW YORK (MainStreet) — College degrees have earned a bad reputation in recent years as new graduates struggle to find work, but parents and students who forked over six figures for education expenses can take heart: one new study shows that college is still the best investment.

Money spent on a four-year college degree has yielded an average return on investment of 15.2% annually during the previous 60 years, beating out the average returns from the stock market, bonds and housing, among others, according to a new analysis from the Brookings Institution. Stocks, for example, offered an average annual return of 6.8% during the previous 60 years, and housing had an annual return of just 0.4%.

Brookings crunched some numbers and found that the average student today spends $48,000 on tuition and fees for a four-year degree, and forfeits another $54,000 in earnings during the four years they are enrolled, based on the average amount earned by those 18-22 with just a high school degree. That brings the total initial investment for a four-year degree to $102,000.

With that in mind, Brookings reviewed historical trends in average salaries by degree, along with traditional investments, to find out if students really would be better off by skipping college and just having a parent write them a check for $102,000. As much as some students might dream of this scenario, it turns out to be worse for their bank accounts in the long run.

As the researchers explain, the salary of a 22-year-old with a college degree is 70% higher on average than the salary of a 22-year-old with a high school degree, and this difference persists to varying degrees throughout one’s career, so that over the course of his or her life, the college graduate will earn $570,000 more than the average high school graduate.

“Indeed, the recession has not fundamentally changed the math: although a college degree has upfront costs, it is important to remember that it is an investment that pays off over time. The evidence clearly shows more education improves your chances in the labor market, in both good times and bad,” the researchers note.

Of course, this study doesn’t take into account the cost of interest rates on student loans, which may cut into the profits of the college investment a bit, not to mention the impact that excessive student loan debt may have on students’ financial decisions and general quality of life throughout their 20s and 30s.

Then there’s the simple fact that many 22-year-old college graduates in recent years were either unemployed or working lower-paying jobs unrelated to their profession, which, according to one study from the National Bureau of Economic Research, may cut down their wage growth by 70% throughout their career. Though even by that estimate, college would remain an attractive investment.

For those students who simply can’t afford the cost of a four-year degree, Brookings found that the average two-year degree actually yielded even higher annual returns of 20%, but with a big caveat: The higher rate of return was largely due to the lower price tag of tuition and fewer lost wages that come with a two-year degree. In reality, someone with an associate’s degree earns just $170,000 more throughout their career than someone with a high school degree, but if the choice is between this and nothing, the associate’s degree is certainly a good buy.

—For a comprehensive credit report, visit the BankingMyWay.com Credit Center.

Show Comments

Back to Top