Blog | Personal Finance

Is a College Education Worth It?

How much does college really cost and is it really a good investment for you?

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Here in Phoenix, the summer is coming to a close for our local college students. If you drive by Arizona State University, you can see activity picking up. The kids are starting to come back and soon classes will resume.

When I talk to young men and women on their way to college, I often ask them why they're going. Many times the response is, "I don't know. My parents want me to get a good education so that I can get a good job."

This line of reasoning made sense decades ago before Nixon changed the rules of money in 1971 and the rules of retirement changed in 1974. But, as I've said before, getting a good job made sense when the dollar was backed by gold and worth saving, and when companies took care of their employees for life through a retirement plan. Today, that path makes little sense.

Not anti-education...anti-bad-investment

Many people think that I'm anti-education. But nothing could be farther from the truth. I attended college and found it to be beneficial in many ways—though those benefits were more intangible like leadership skills. But I hold no illusion that it is responsible for my success today, and, as I also wrote, the skyrocketing costs of a modern college education are creating diminishing returns when it comes to the value of a college education.

The problem isn't college. It's that college is considered a sacred cow, causing many people to blindly hold onto the truism that a good education equals a good job and rush into college with no plan and no concept of the risk they are taking.

Unfortunately, for many people a college education is actually a bad investment. And I’m definitely anti-bad-investment.

The rising costs of college

A recent CNBC article (“The cost of college increased by more than 25% in the last 10 years—here’s why”) shares some illuminating statistics on the rising cost of education:

From 2008 to 2018, the average tuition at four-year public colleges increased in all 50 states. On average, tuition at these schools has increased by 37%, and net costs (including factors like scholarships and grants) have increased by 24%, according to a 2019 report from the Center on Budget and Policy Priorities.

Meanwhile, real wage growth has been flat for most jobs—and negative for many. As the Pew Research Center reports:

After adjusting for inflation, however, today’s average hourly wage has just about the same purchasing power it did in 1978, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then. In fact, in real terms average hourly earnings peaked more than 45 years ago: The $4.03-an-hour rate recorded in January 1973 had the same purchasing power that $23.68 would today.

In other words, when it comes to college degrees, people are paying more for less.

What's worse, many students take on a huge student loan burden, which affects their quality of life after graduation and cuts significantly into any higher earnings they might have as a result of their degree.

And these loans aren’t just for a degree.

According to the "USA Today", "About half of students blow some of their school loan money on non-educational expenses, including 3% who spent it on alcohol and drugs, according to a new Student Loan Hero survey."

You read that right. Nearly 50 percent of college kids take out student loan money in order to spend it on things like:

  • Vacations (3%)

  • Restaurants (13%)

  • Clothes (15%)

  • Car Expenses (19%)

  • Monthly expenses like mobile phones (41%)

As Andrew Josuweit, CEO of Student Loan Help, tells "USA Today", "I think they're justifying it because of future income. They're thinking, 'This is the cost of doing business, this is my overhead.'"

In other words, they think it is free money. Not only are young people paying more for less when it comes to college...they’re also buying more debt for less. A potent combination for financial struggle. And a bad investment.

Why college is often a bad investment

There is such a thing as free money. We've talked a lot about Other People's Money (OMP) in Rich Dad circles. The concept of OPM is simple, but the execution of the concept takes a high level of financial intelligence. With OPM, you use other people's money to invest in cash-flowing assets that cover both the expenses required to maintain the asset and the expense of the investor capital (OPM). In the process, you significantly increase your return on investment.

A common example is using a bank to fund a real estate investment. You put up 20 percent of the capital and the bank puts up the other 80 percent. In return you get 100 percent ownership for 20 percent of your own money and 80 percent of OPM. If you find the right investment, the income covers the OPM and provides you cash flow each month. As such, your return is much higher on only 20 percent of your money than if you had to put up all the money.

The problem college kids have is they think they are "investing" when they take out student loans. They are not. Often they are taking on liabilities that take money out of their pockets for years to come. And when you compound that with spending that loan money on liabilities like vacations and restaurants, the financial predicament they get themselves into is quite dangerous.

Because of facts like these, I often encourage young men and women to forgo college unless they know they have a need for it. The old rule of go to school and get a good job is an obsolete one. You can no longer expect that going to college will provide you a stable financial future. You must first have financial intelligence and understand why you want to go to college in the first place.

Is college worth it for you?

In the end, I can't tell you whether college is a good or bad decision for you. No one but you—not even your parents—can do that. While I think in most cases there are better ways to get ahead in life, such as investing in your financial education and learning to sell, many people do go to college.

So, if you're planning on going to college or are currently attending one, here's my advice.

Know why you're going and make a plan. Don't go to college expecting to discover what you want to do in life. Know what you want to do in life and organize your education accordingly. If you want to be a doctor, take pre-med classes and go to medical school—and understand the cost of that decision. If you want to be a business owner, invest in your financial education—something you often won't find in the hallowed halls.

Also, don't get caught in the trap that more expensive is better. Keep your costs as low as possible. In the real world, what school you attended becomes less and less important and your character, drive, passion, and intelligence prevail.

Finally, use your free time to supplement your education. As I've written many times, what conventional wisdom considers a "good" education is really an incomplete one. You will not learn how to prosper financially in college. You will not learn how money works. You will not learn how to invest. You will not learn even the simple definition of an asset, something that puts money in your pocket, and a liability, something that takes money out of your pocket. You must take charge of your own financial education. Only then will you have a complete education.

Best of luck.

Original publish date: August 10, 2010

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