Is a College Degree Worth the Student Loans?

KEY POINTS

Student loans continue to be the largest source, in dollar terms, of non-mortgage debt owed by families
Families with a college degree have a positive correlation with higher income and net worth
Actual and expected inheritances are positively influenced by attaining a college degree

The Biden Administration has put student loans at the forefront of American domestic politics. The Administrations’ proposed changes have attracted multiple court challenges and they may eventually make their way to the U.S. Supreme Court. As the U.S. population braces for a change in party control within the House of Representatives, we should give some critical thought to the value of college education.

“It is estimated that the total U.S. federal student debt is currently $1.7 trillion and is shared by 43 million individuals; or, roughly $40,000 per borrower on average. Student debt continues to be the largest source, in dollar terms, of non-mortgage debt owed by families (Federal Reserve Board’s Triennial 2019 Survey of Consumer Finances (“SCF”)).”¹

We have all heard stories of individuals in their 50’s and 60’s struggling with student loans taken on while they were in their 20’s and 30’s. When combined with knowing the depth and breadth of the total student debt and it’s impact on society, some may second guess the value of a post-secondary education.

Although post-secondary education is not a good fit for everyone, it certainly has significant upside potential for those decide to take such path and are able to make wise choices along the way. These strategic choices are detailed in our post Financial Literacy - A Definitive Guide.

We cannot address every possible choice in this post. Therefore, we will focus on one key choice:

CAREER

Yes, this seems like an obvious choice that should not require much, if any, discussion. However, as noted in our How Much Do Skilled Trades Pay? post, you must find your intersection of passion, ability, and income desire.

You may want a degree in basket weaving, and you may even have the innate potential to become a renowned basket weaver; however, it’s income potential may fall woefully short of your legacy goals and requirements. Alternatively, you may pursue musical stardom, but may lack the talent to earn your desired income.

The beauty about college is that it gives you the opportunity to receive some of the most advanced skills across multiple fields of study. The trick is to find that optimal set of skills that resides where your passion, ability, and income potential overlap. Ideally, college will provide you with more than one career path to consider.

The process of choosing a career path can be stressful and full of questions that may be without answers for several years to come. This post will not delve into the process of choosing an ultimate career path. Rather, it will focus on the long-term legacy goals that a college education may help you to achieve.

A final comment on career choices: automation and artificial intelligence. The disruptive impact of these forces are detailed on our post Is Your Job at Risk of Automation. All workers, young and old, will need to consider the potential impact on their career.

Net Worth

The ability to increase and protect your net worth to your unique target level is a fundamental legacy goal. Your net worth is highly correlated with your ability to impact your family, community, charities, etc.

What exactly is net worth?

Net Worth = Assets - Liabilities … simple as that

Ideally, you will invest in assets that are growing at a risk adjusted rate of return that matches your unique risk tolerance. Liabilities are not necessarily a negative, even though they decrease your net worth. Liabilities imply leverage. Leverage utilized wisely can be very beneficial to growing your net worth. Leverage mismanaged can have a devastating impact on your net worth. The missing element from the equation above is:

Income

As expected, income is essential to generate net worth. The question is:

Does the income potential from a college degree justify taking on student loans?

Just as you must be wise when choosing a career, you must be just as wise when choosing a post-secondary institution. You will need to assess the financial pros and cons of the schools offering your program(s).

College degrees often lead to the top paying jobs.

Today, we will look at this dynamic from a macro level. The following chart is an excellent starting point and has been derived from the SCF:

Before we dig into the numbers, a word about Median vs Mean. Median is the middle value of all persons in the sample (i.e. 50% are above the value and 50% are below the value). Mean is the average value of all persons in the sample. As expected, mean values exceed median values. To illustrate, we will consider a sample consisting of 3 individuals with incomes of $50,000 / $150,000 / $1,300,000. The median value is $150,000 and the mean value is $500,000.

It is readily apparent that incomes and net worth are positively corelated with education levels. I would like to emphasize positively corelated. An individual may possess a college degree; however, their desire and ability to earn income may put them well below the figures illustrated above. Similarly, an individual that never obtained a high school diploma may well exceed the highest income and net worth figures in the chart above. The figures presented are based are large sample sizes. Individual results may vary. The key takeaway is:

Education is strongly corelated with income and net worth.

The SCF highlights that “in 2019 the average net worth for the top 10% of the population is $1,220,200”¹. As noted above, the average net worth of with a college education is $1,519,900. Therefore, possessing a college education is corelated with having a net worth in the top 10% of the population.

These are powerful forces within our grasp. They should not be brushed aside.

Now we must consider student loans and over student debt. At a national level, the total approximate student debt of $1.7 trillion is hard to fathom. Fortunately, we are walking along your legacy journey and not directly responsible for government fiscal and monetary policies.

The SCF denotes that in “2019, 21.5% of families had student loans. The median and mean amounts were $22,300 and $40,300 respectively”¹. At a macro level, we can conclude that such rates of indebtedness compare favorably to the income and net worth amounts illustrated above. To further illustrate the traits inter-related to education, we provide the following traits of a 40 year person with student loans:

It is exciting to see how education has the potential to fuel an enhanced income potential. Such naturally increases the chances of achieving an above average net worth throughout your lifetime. Which brings us to one of your legacy’s primary goals:

Multi-generational wealth transfers

This is a beautiful stage in your legacy journey. The ability to transfer wealth to members of your family, friends, center of worship, or a favorite charity is a blessing that can reverberate across multiple generations and geographical borders. Such wealth transfers can be done while you are still alive (inter vivos transfer: e.g., provide down payment support for a home purchase) as well as at your time of passing (testamentary transfer: e.g., transfer made in a will after death).

With a college degree in hand you are more likely than many to pass along a larger and potentially more impactful inheritance. The following table illustrates this dynamic.

This data further demonstrates how a college education is corelated with the potential for higher income, net worth, and final estate values. It is apparent that 5.3% (27.2-21.9) more families with a college degree receive an inheritance than those families that do not have a college degree. What is more interesting is that the 27.2% of families receiving an inheritance with a college degree is a 24.2% (5.3/21.9) increase over those that do not have a college degree.

As expected, the median value of the inheritances received was higher for families with a college education versus those families without a college education: $92,700 and $76,200 respectively. It is interesting to observe that the percentage of individuals expecting an inheritance was less than the historical experience; whereas, their expectation in dollar terms was more than the historical experience.

Conclusion

There are no guarantees in life. Many obstacles may present themselves along your legacy path that impair your ability to fully maximize the income potential from your college education. However, history is on your side should you commit to pursuing a college degree that intersects your passion, ability, and income potential.