We are all seeing a lot of reports that show the cost of attending college is rising faster than inflation and the record levels of student loan debt (currently at an average $33,000 per graduate according to Edvisors). Combined with the difficulty recent college grads are having finding jobs and paying their student loans, the question has to be asked: is a college degree worth the cost?
The clear answer is yes, a college degree is worth the cost for the majority of people .
However, the answer can be complicated by the level of education you attain and the type of degree that you acquire. So let’s break it down a little further.
Why is a college degree a good investment?
Money, the answer boils down to money. On average, college grads earn twice as much as high school graduates. The following chart shows the difference in income between different levels of education:
Let’s run some quick math and look at the lifetime impact of a bachelor’s degree on income. To keep the math simple, we will assume the worker receives a 2% raise every year for forty years.
The average wage for a college grad with a bachelor’s Degree is $46,900 while their friend with a high school diploma will only earn $29,960 (2012 numbers from the National Association of Colleges and Employers – NACE). The average college grad will earn over a million dollars more than the average high school grad without a college education during their 40 year career. Suddenly, that $33,000 in student loan debt doesn’t look so bad. You would be right if you thought that not getting your bachelor’s degree could end up costing you a lot of money.
There is, however, a giant catch…your field of study.
Does the grad’s major have any impact on the value of their education?
Absolutely. You probably won’t be surprised that degrees in engineering, business and the sciences lead to more income than a degree in the arts, humanities, and social sciences. That income means more financial opportunity to build wealth and realize financial goals. Here is how the NACE study breaks it down:
|Field of Study||2012 Annual Salary|
|Math & Sciences||$42,471|
|Humanities & Social Sciences||$36,988|
Salaries can also fluctuate widely within each area as well. Keep in mind that these are average numbers. For college grads with a low income major, a study by the Pew Research Center shows that 25% of them will struggle to make as much as someone with only a high school diploma.
The lesson learned here is that you have to choose well to ensure your college education is a good investment. Choose an expensive school with a low paying field of study, and you will need to keep a close eye on your student loan debt.
How much is too much student debt?
Some people say that your total student loan debt should not exceed the entry salary for your first year of employment after graduation. This means that, if your career starts out at a $40,000 annual salary, you should not borrow more than $40,000 in student loans. That seems pretty high to me. The payments would be $425/month or about 17% of the new employee’s take home pay if paying the loan off in ten years. Considering all of the other living expenses like car payments, insurance, and housing, spending 17% of your net income is far too much.
I would recommend planning on having a student loan payment that is at most 10% of your take home pay. For that $40,000 a year employee, the math works out much closer to $28,000 in total student loan debt and $300/month in payments over ten years (assuming a 5% interest rate for both examples). As an alternative for those who do accumulate more student debt, they could consolidate their loans and make lower payments over a longer term. However, extending the length of the loan would cost more in the long run due to the increased interest. If you can afford the payments, you are much better off sticking with the ten year schedule.
What can you do if you’ve already graduated and are struggling to make the payments on your student loans?
To answer this question completely, I would need to write an entirely new article. However, you should start by investigating the loan repayment options available to you.
Apprisen’s free student loan and financial counseling will help you understand your options and give you the guidance you need.