Study: College Degree Is Better Investment Than Stocks, Bonds, or Gold

Last Updated Jun 27, 2011 8:18 AM EDT

The value of a college degree has been taking it on the chin a lot lately, with critics suggesting that it's not necessarily the slam-dunk investment that we've come to take as a national article of faith. Pimco's Bill Gross supplied some new ammunition for those critics in his most recent monthly note, noting that tuition has outpaced the general rate of inflation by 6 percent for the past 25 years, and that the aggregate amount owed on existing student loans is now a staggering $1 trillion. But a new study suggests that college does in fact live up to its investment potential, delivering a better return on investment than the payoff from investing in stocks or bonds.

Where You Can Earn 15.2 Percent: College
Economists Michael Greenstone and Adam Looney start with the well-trod data that shows college grads, on average, do indeed make more than high school graduates. Here's what the earnings path looks like:

But then they take a step back and ask if the higher earnings are in fact large enough to compensate for the upfront cost of attending school. In their study, published by the Hamilton Project at the Brookings think-tank, they settle on a $102,000 cost for attending a four year college these days. That includes tuition and fees, and the opportunity cost of spending those four years in school rather than being out in the real world pulling in a paycheck. Room and board is left out of the equation since you incur those costs whether you're at college or not.

The economists calculate that the value of average higher lifetime earnings with a college degree works out to a 15.2 percent internal rate of return on the $102,000 upfront cost. If you instead opt to give your kid $102,000 and let her decide how to invest it (scary thought, but this is just an academic exercise), nothing else would come close. The authors note that the 15.2 percent is:

"....more than double the average return over the last 60 years experienced in the stock market (6.8 percent), and more than five times the return to investments in corporate bonds (2.9 percent), gold (2.3 percent), long-term government bonds (2.2 percent), or housing (0.4 percent)."
The economists note that the peak average earnings for someone with a high school degree will be about as much, on average, as what a college grad will make a few years out of school. And over a lifetime of work, you see the real payoff in the upfront investment: The college grad will on average earn about $570,000 more than the high school graduate. A pretty good return on that $102,000 initial investment.

College Pays, Even if You're Not Feeling It Right Now
If you're a recent college grad still looking to land that first big career job, or the parent of said grad with the same worry, the economists have some soothing words:

"Higher education is a much better investment than almost any other alternative, even for the 'Class of the Great Recession' (young adults ages 23-24). In today's tough labor market, a college degree dramatically boosts the odds of finding a job and making more money."

That's backed up by a recent report from the U.S. Bureau of Labor Statistics that shows college grads (all grads, not just recent ones) have lower levels of unemployment on average, in addition to higher earnings. Here's the BLS's case for the economic value of higher education:

And if you're a recent grad still looking for work, some much needed good news is that businesses say they are ramping up their 2011 hiring of college grads.

The Debt Factor

What these studies don't take head on is the cost of borrowing for school -- a cost that can push your all-in tab into nose-bleed territory if you're not careful. As Gross noted, the average student graduates with $24,000 in debt. That's a lot of money. But it's not a recipe for disaster, either. Mark Kantrowitz of the website is one of the nation's foremost authorities on student debt. His general advice is to keep your total borrowing costs to no more than what you can reasonably expect to make in your first year out of school. Students who borrow more than that have a much higher propensity for getting into payback trouble. If you're borrowing $20,000 or so, that's probably going to land you in the safety zone once you're out of school. It's when you pile on $50,000, $70,000 or more and then land a $35,000 starting salary that you are asking for trouble.

The academics can make their case for the investment value of college, but you do need to seek out a sweet spot of out-of-pocket cost that makes sense for your family. A boatload of debt for student and parent isn't likely to end well. Besides, as MoneyWatch's Lynn O'Shaughnessy has repeatedly advised, there are plenty of ways to bring down your college costs, starting with making a full-on press for maximum financial aid.

Photo courtesy Flickr user Sean MacEntee

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