Higher Education

Higher Education A Better Investment than Stocks, Bonds, Real Estate

With the unemployment rate still high and many college graduates struggling to find jobs today, you may be questioning the viability of even obtaining a diploma. Why spend four years getting a BA and perhaps even another two getting a Master’s degree if you’re not going to end up in the area of your expertise? Because even with a difficult job market getting a college degree is your best bet in earning higher income, and it provides you with a better ROI than investing in stocks, bonds, or real estate.

According to findings from the Brookings Institute, a nonprofit public policy organization based in Washington, D.C., on average, the benefits of a four-year college degree are equivalent to an investment that returns 15.2% per year. This is more than double the average return to stock market investments since 1950, and more than five times the returns to corporate bonds, gold, long-term government bonds, or home ownership. From any investment perspective, college is a great deal.chart1

The Brookings Institute took a look at the average cost of a college education, estimating that the financial outlay (tuition and fees) is about $48,000 for four years. They also added the additional opportunity cost of not working while going to college.  On average, 18 and 19 year olds right out of high school earn about $11,600 per year, while 20 and 21 year olds with a high school degree average about $15,400 per year. So when you add up the cost of the college along with the opportunity costs of not having employment during this time, total investment for a four-year college degree is about $102,000.

If you took this money and indeed invested in a college education, an 18-year-old will have the job opportunities and earnings of a college graduate for the remainder of his or her working years (until she is 65). If he or she chooses instead not to invest in a college education, he/she’ll face the job prospects and earning power of a high school graduate. Taking a look the chart, you will see that at age 22, the average college graduate earns about 70% more than the average person with a high school degree only. But that only tells part of the story. For example, in 2010, a college graduate at age 50 (the peak of his/her career) earns approximately $46,500 more than someone with only a high school diploma. What’s more, at the peak of the individual’s earning power, the average worker with only a high school degree earns only about as much as a college graduate one year out of school. In other words, the average college graduate will surpass the highest earnings of the average high school graduate soon after graduating. The bottom line: College grads do better than their high-school degree only peers.

The Brookings Institute then looked at whether these higher earnings were worth the up-front cost of $102,000 from an investment point of view. They calculated the rate of return to college compared to other investments, as shown in the figure to the right. The $102,000 investment in a four-year college yields a rate of return of 15.2% per year—more than double the average return over the last 60 years experienced in the stock market (6.8%), and more than five times the return to investments in corporate bonds (2.9%), gold (2.3%), long-term government bonds (2.2%), or housing (0.4%).