College or Not?
Imagine this scenario. You are 18 years old. Having just graduated from high school you don’t know if you should go to college or not. You don’t have a full ride scholarship and your parents are not going to be able to foot the bill. If you look at the statistics you’ll see that the average college graduate in 2016 had $37,000 in student loan debt.
What do you do?
What if I’ve Already Made the Decision to go to College or Not?
More than likely, you are not an 18-year-old reading this. More than likely you have already passed your college years. But I don’t want you to stop reading this article. You most likely know someone who is not yet in college. Somewhere along the line, you will probably make a recommendation or give some advice to a teen still in high school.
If you give the standard advice you’ll say something like, “Go to college, get a degree and you’ll be better off.”
And even if you never give someone advice about going to college or not, I want to present a different way of looking at things. To do that, we need to look at some numbers. I don’t need you to memorize these numbers. But as you read through this article, I would ask that you start to think about what these numbers mean in real life situations.
College vs No College Income Levels
At first glance it makes logical sense to recommend someone go to college. According to a study by Bureau of Labor Statistics data released in 2016, high school graduates earn, on average, $678 per week (about $34,000 per year). College graduates earn $1,227 per week (about $61,000 per year).
A high school graduate makes a little more than half what a college graduate makes. So, everybody should go to college right?
No, not really. This average wage picture only shows one aspect. But there are a lot of other ways to look at it.
College Education vs Taxes
I used the TurboTax tax estimator to compare the two salaries. Since most young adults in their 20’s still live at home, I calculated based on single, living at home, no dependents, no extra tax write-offs. This should give the best comparison.
High School Graduate – If no taxes were withheld throughout the year, the high school graduate would owe $3,695 in taxes. That brings their income to $30,305 per year.
College Graduate – If no taxes were withheld throughout the year, the college graduate would owe $9,453. That brings their income to $51,547.
So, when you look at the after-tax numbers, the gap between college degree and no college degree drops from $27,000 to $21,000.
This figure does not include state income taxes, which would reduce this gap by another thousand or two more for most states.
College Education vs Student Loan Debt
As mentioned earlier, the average student loan debt has increased to just over $37,000 for college graduates.
The typical Federal Stafford student loan has an interest rate of 6.8% and a ten-year repayment schedule. (Although most people take MUCH longer to pay off their student loan and it will only get worse as the average debt load increases.)
The monthly payment for a $37,000 student loan debt at 6.8% interest and a 10-year payoff is $425.
High School Graduate After Tax Income – $30,305. Income after $0 in debt repayment – $30,305.
College Graduate After Tax Income – $51,547. Income after $5,100 in annual debt repayment – $46,447.
The wage gap between a high school graduate and a college graduate now drops to $16,000.
Income During College
Most college students do not work during college. And if they are working, they are spending that money on college tuition or other living costs.
Let’s assume that from the age 18-22 the college student saves no money. And let’s assume their high school graduate counterpart saves 50% of their after-tax income.
High school graduate savings account at age 22 – $60,610.
College graduate savings account at age 22 – $0.
So, both young adults are now age 22. They are both still living at home. (The typical single millennial will live at home well into their late 20’s and even early 30’s). The high school graduate has over $60,000 in savings and the college graduate has nothing in savings and a $37,000 debt.
Let’s now assume that both adults will continue living in their parents home for another 2 years and then go to buy a house. Let’s say the high school graduate continues to save half their after-tax income and the college graduate saves half their after-tax, after student loan repayment income.
Buying a House after College
High school graduate savings that can go towards down payment – $91,000
College graduate savings that can go towards down payment – $45,000.
A typical mortgage loan calculation is figured on the gross income. This means, that lenders don’t figure in how much you pay in taxes. They take your gross income (before taxes) and subtract your monthly debt expenses. Most lenders don’t want to see a total debt to income ratio above 38% for your mortgage payment and other debt obligations.
These calculations are based off the bankrate.com calculator
High school graduate gross monthly income after debt payments (which are $0) – $2,833
College graduate gross monthly income after debts payments ($425) – $4,658
Maximum house payment lender will allow: These calculations are based off the bankrate.com calculator. These calculations also figure in taxes and insurance.
High school graduate – $975. That would be a maximum house price of $220,000.
College graduate – $1,450. That would be a maximum house price of $286,000.
Let’s assume both buyers buy the most expensive house they can afford and they buy with a 30-year mortgage. The college graduate would be able to buy a $45,000 more expensive house even though they have half the down payment. Along with that nicer house comes higher taxes and insurance.
Alright, let’s summarize where we are at now.
Both adults have now purchased their first home. Both homes are above average starter homes in a typical suburban area. They are 24 years old.
High school graduate after tax income – $30,305. Income after making the house payment – $18,605. Debt owed on student loans $0. Debt owed on house – $130,000
College graduate after tax income – $51,547. Income after making the house payment and student loan payment – $29,047. Debt owed on student loans $32,000. Debt owed on house $240,000.
Wage gap between college graduate and high school graduate – $10,445.
Net worth high school graduate – $90,000
Net worth college graduate – $13,000.
Let’s do something crazy
Now let’s try something else. Let’s say the high school graduate buys a house at age 20. They have $30,000 saved up and put 20% down on a $150,000 starter home and get it on a 15-year mortgage. They get a roommate who pays $350 per month and take that extra rent, using half if it towards monthly expenses and put the other half as extra on the mortgage. Let’s assume a 3% appreciation rate on housing values.
Now let’s visit them again at age 26.
High school graduate income after tax income $35,000. (It’s higher because he included the rent from the roommate in their income. But their taxes were actually $500 lower because of tax benefits of owning a home and living on their own.)
Income after making house payment – $22,400.
Wage gap is now down to less than $7,000.
But here is the kicker – The 26 year old has a house that is now worth $179,500. And he owes only $65,000.
The high school graduate has a net worth of $115,000.
The college graduate has a net worth of $13,000.
At this point in time, who has more options? The high school graduate or the college graduate?
What Does This All Mean?
These are a lot of numbers and they assume certain things. But here are some main concepts I want you to think about.
- The more money you make as an employee, the higher your taxes will be.
- Spending four years in college means you have four years you are not working. This means no income. It means no work experience. It means no savings.
- Going to college usually means taking on tens of thousands of dollars in debt. This monthly payment dramatically decreases the benefit of higher wages from a college degree.
- Opportunity cost. This is the biggest factor that one cannot put a hard value on. There are a lot of lost opportunities that can take place while someone is in college and in the college debt repayment years.
- Saying you make more going to college is true statistically but there are A LOT of exceptions to the rule. There are many college graduates who do not earn a higher income because of their degree. There are many jobs that require no college degree that pay the same or more than those that require a college degree.
- One of the negative consequences of college is that it teaches students the only way to earn money is working for an employer. It eliminates creativity and also down plays the role of owning a business.
Is College a Bad Idea?
My point is not to say that college is bad. My point is to say that most high school seniors only get told one thing…go to college. It is assumed that they will go. It is assumed that they will take out student loans. It is assumed that they will go out and finance a car. It is assumed that they will defer student loan payments for many years.
All these things are completely normal. But normal isn’t working out so well for lots of people.
My point is to show you that there are other routes that one can take. If someone is financially literate and understands the power of paying interest vs benefitting from interest it can be worth hundreds of thousands of dollars to them over the course of their life.
This is just one example and I’m sure you will find it easy to pick apart my assumptions. You may be saying to yourself, “How many high school graduates make $34,000 per year?” “How many of them will save half their income to pay towards a house?” “Going to college is worth more than just the money.” “Those with college degrees have more room for advancement.”
I’m not going to argue any of those points. I am not trying to make one blanket statement. I am trying to present new thoughts and ideas about life as it relates to decisions around money.
And just for the record, the example that I presented is totally doable for a teen not wanting or able to got to college debt free. Feel free to check out my about page to read a little more about me personally and why I expect to be a millionaire by the time I am 40. This will be without a college degree and without an income over $60,000.
I’d like to also recommend a book. I have recommended this book in other articles but I am going to recommend it again. “Rich Dad Poor Dad” by Robert Kiyosaki. I think it is very important to be informed of other ways of thinking. I do not agree with everything that Robert Kiyosaki teaches. But I do think it is very enlightening.