Module 8: Present Value
Is a College Education Worthwhile?
Thomas Bishop
Nathan Grace
Sejla Karalic
Anzhelika Lyubenko
December 7, 2008
Introduction
This research report examines the present and future values of a college educated individual’s and high school educated individual’s disposable income. It allows us to determine whether it is worthwhile to attend college compared to working right out of high school. We will specifically identify our criteria, discuss our results, and provide a definitive recommendation whether college education is worthwhile.
Criteria
We collected a series of data to help us accomplish our goal. This data includes: a discount rate, average annual percentage change of college tuition, annual percentage change in the consumer price index, annual starting salary for a high school graduate, annual starting salary for a college graduate and annual single-parent cost of raising one child as a high school graduate and college graduate.
The discount rate we have chosen is eight percent. The reason we have chosen this is because we are assuming that individuals should receive annual raises to keep up with inflation. In addition, the increase in income should improve their standard of living and reflect increase in work experience.
The average annual percentage change of college tuition was 6.3 percent and found in the College Board online database (2006). The same source provided our data for annual four-year public institution tuition and fees which amounted to $5,492. We applied the 6.3 annual percentage change to the annual tuition in order to calculate college costs over five years. We assumed the average number of years it takes most people to receive a bachelors degree is five years.
We used the annual percentage change in the consumer price index (Consumer Price Index, 2008) to measure the cost of raising the child and cost of attending college. It was meant to identify the annual change in the standard of living.
The annual starting salary for a high school graduate and college graduate were taken from the Bureau of Labor Statistics (2008). We used median annual salary figures for people aged 25 or older. Therefore, we had to use present value calculations to back-track to age 18. We assumed college graduates did not make any money while attending college for five years.
The annual cost of raising a child was obtained from MSN Money (Cost of Raising Children, 2008) who cited a survey conducted by the U.S. Department of Agriculture. We chose to examine a single-parent household with one child because we were only looking at disposable income changes for one individual who attended college. If we chose to look at dual parent families, we would have to figure out if the spouse was employed and then find income data for married individuals, which was beyond the scope of this project. The average age to have one’s first child is twenty-five; therefore, we started the cost of raising a child at twenty-five and continued until the child was seventeen.
Results
Our first area of analysis is the high school graduate without a child. With an outstanding annual rate of return fixed at eight percent, the high school graduate will earn a total of $10,515,064.64 in their lifetime. All of these figures can be found in the Appendix, Table 1. In comparison, individuals with bachelors degrees will earn about 62 percent more in their lifetime than high school graduates.
Having a child imposes a financial burden, but not a very substantial one when you have an eight percent salary increase every year. High school graduates with one child earn a total of $10,330,974.30 over their lifetime, this is $184,090.34less than if they never had a child. College graduates with a child earn $16,577,452.91 in their lifetime which is $398,444.63 less than if they did not have a child. The college graduate earnings figures include college costs and the costs of raising a child.
When a college graduate begins working at the age of 23, their starting salary is $44,002.05. This figure is $17,074.76 higher than the high school graduate’s earnings at that time. Total college costs for five year are $31,144.89 which the college graduate could pay off within three years if they choose to. This analysis does not include mortgage costs, car payments, or any consumption goods.
Conclusion
College is definitely worthwhile according to our analysis. If you receive an eight percent rate of return, as is noted in chart 1 of the appendix, you will see substantial income increases around the age of 42. The cost of college can easily be paid off within the first few years of employment and having a child also does not pose too big of a financial burden. However, we would personally recommend not having children and completing a bachelors degree; this would result in $367,299.74 of extra disposable income to invest.
We are aware there exist other externalities that may affect a person’s decision to attend college. Those may include performance in high school, family responsibilities, family educational background, loan availability, and medical conditions.
We would definitely recommend pursuing a Master’s degree. With an eight percent salary increase per year, a Master’s education would result in even more substantial increases of disposable income. Overall, we recommend as much education as possible and not having children.
Appendix
Table 1
High School Net Disposable Income / Bachelors Net Disposable Income / High School Net Disposable Income with 1 Child / Bachelors Net Disposable Income with 1 ChildTotal / $10,515,064.64 / $16,975,897.54 / $10,330,974.30 / $16,577,452.91
Chart 1
References
2006-07 increases in tuition, fees, room, and board. In CollegeBoard [database online]. Trends in College Pricing, 2006 [cited 12/03 2008]. Available from
CDC: Women waiting longer to have first child. in CNN.com [database online]. CNN Health, 2003 [cited 12/03 2008]. Available from
Consumer price index. in U.S. Department Of Labor [database online]. [cited 12/03 2008]. Available from ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt.
The cost of raising children. in MSN.money [database online]. [cited 12/03 2008]. Available from
Education pays. in U.S. Department of Labor [database online]. [cited 12/03 2008]. Available from