If you haven’t guessed it already from the famous number in the heading, we’re talking about Student Loan Debt. This gigantic number consistently gets a lot of press coverage, regularly held up as the main reason millennials are currently struggling financially, and will be for years to come. So in this article, let’s tackle the highly debated question, “Is getting a four-year Bachelor degree a good financial decision?”
Now before we continue, I want to clarify something. I am NOT anti-education, in fact nothing could be further from the truth. I own and run an education company, and am a huge proponent of life-long learning. But I also believe in prudent financial decisions, letting the data help guide my path. With that in mind, let’s address the issue of student loan debt from a strictly financial approach.
Let’s first start with putting the unfathomable number of $1.6 Trillion into perspective. Did you know it took our country, the entire United States, 204 years to reach that level for the National Debt! Now this amount of student loan debt did not happen overnight, but it has recently been growing at an alarming rate. In the last decade alone, it has increased by 104%! And this is at a time where young people and companies alike are questioning the real value of a college education.
In a 2019 Gallup poll, 41% of Americans between the age of 18 and 29 said college was “very important.” That was down dramatically from 74% in 2013. Last year, Tim Cook made headlines by stating that you don’t need a degree to be successful. He even put his money where his mouth is because ~50% of Apple’s new hires in 2018 did not have a four-year degree. So with the tide appearing to shift, let’s look at the math.
There are 45 million Americans responsible for paying back the $1.6 trillion student loan debt. With that many people involved, there will be various unique situations and methods for paying back this debt. So let’s look at the averages. For the sake of this article, we’ll use the following information:
· Average student loan debt: $38,731 (Forbes)
· Average amount of time to pay off debt: 20 years (Dept. of Education)
· Current federal student loan interest rate: 4.53% (studentaid.gov)
· Monthly student loan payment: $246 (math)
· Median salary for Americans: $49,764 (Bureau of Labor Statistics Q1 2020)
· Median salary for American w/ Bachelor degree: $72,020 (Bureau of Labor Statistics Q1 2020)
· Median salary for American w/o degree: $39,936 (Bureau of Labor Statistics Q1 2020)
· Age entering work force: 18 (non-college); 22 (college)
· Age retired: 65
· Salary contributed to future investments: 10%
· Interest rate earned on investments: 8%
To make this easier to follow, we’ll look at two different situations. Meet Sally and Beth. They are both high school seniors and best friends. Upon graduation, Sally decides to pursue her Bachelor’s degree and graduates 4 years later. On the other hand, Beth decides not to attend college and gets a job right out of high school. Let’s look at their finances at age 65.
Here are some assumptions:
· Each designates 10% of their income toward future investments
· Because Sally has a loan payment, she must reduce her contribution by that amount to 6% for the first 20 years before going to 10% for the remainder of her career
· Calculations do not take into account any other lifestyle expenses
· Sally earned 80% more than Beth each year
· Sally earned $1.2 million more than Beth over their careers
· Sally contributed 34% more to her future investments than Beth
· Both eared the same rate of return
· Beth has nearly $270,000 more than Sally at age 65 (15%)
· Beth has more money at age 65 than she earned her entire career
Wait, is this what you expected? I mean all the way through, it seemed as though Sally was ahead in every category. So what contributed to this surprising result? Well, 3 main things contributed to Beth having more money at age 65.
1. Time – Beth started working 4 years earlier. While that doesn’t seem like a lot, it meant she was contributing at age 18, netting her almost $20,000 before Sally even starts working at age 22. Again, might not seem like a lot, but more time helped Beth better leverage reason #2.
2. Compound Interest – Because Beth started working earlier, she had more time to earn interest on her money, and then earn interest on her interest, and then interest on her interest’s interest, and so on. It’s amazing how interest & time can really make money multiply!
3. No bad debt – Because Beth did not have a student loan payment, she was able to contribute her full 10% from day one, where Sally had to start with a reduced amount. Even though Beth’s contribution amount was much less, she was again able to leverage #1 & #2 earlier in her career.
Bottom line: One could argue that Sally’s student loan debt actually cost her $270,000! So based on the math, do you think it was worth it?
In closing, I would ask the following question. Which is more valuable, a formal education or a financial education?
PS: In case you were wondering, the average Apple corporate employee earns roughly $125,000 annually. So if they were one of the 50% hired without a degree, they would have a cool $6,482,449 at age 65. I guess the real point of this article is……..
GO WORK AT APPLE!