Estimating the Value of a College Education
This calculator can be used to estimate the value of obtaining a college education versus a high school education. The calculator needs a total of six inputs, including:
- The current age of the person being analyzed
- The projected retirement age of the person being analyzed
- The current cost of a college education – this would the total cost including tuition, room, and board after adjusting for money that does not have to be repaid – such as a grant
- The number of years the person will attend college
- The expected starting salary after graduating college – in today’s dollars
- The expected starting salary after graduating high school – in today’s dollars
The calculator then provides the user with four set of outputs, including:
- The projected salary of the person when they reach retirement. This includes both college and high school values as well as the difference between the two salaries
- The projected total earnings of the person when they reach retirement. This includes both college and high school values as well as the difference between the two salaries
- The present value of those projected earnings as well as the difference between the two values
- Finally, the total cost of the college education, which is subtracted from the present value of the earnings delta to develop the value of the college education
Is a College Education Worth it?
The answer might seem obvious to some people. Getting a college education increases the chance of getting a higher paying job, so it’s a wonderful opportunity. Of course, we are talking about “chance” and “opportunity” because nothing is guaranteed. Bill Gates quit college during his second year of school as did Mark Zuckerberg. In fact, Ted Turner, Jack Dorsey, and Michael Dell all dropped out of school to pursue a career and went on to become billionaires. These are all extremely rich people that didn’t graduate from college. Keep in mind that correlation does not mean causation. Meaning these people didn’t get rich because they didn’t finish school.
So, while we always want to wish people much success, not everyone will be this skilled (or lucky). That’s where our calculator can help. By making some very simple assumptions, we can quantify the value of a college education. What assumptions do we make when crunching through the numbers?
When we calculate Final Salary, we assume both the high school and college graduate receive annual raises of 3%. Again, they could make more or less, but 3% is a very reasonable assumption in both cases. Using this value also allows us to calculate the final salaries in both scenarios. Since the calculator knows the starting salary, ending salary, and number of years worked, it is easy enough to calculate the total earnings over their career. It is interesting to see these future values, but we need to work in present values to make fair comparisons. This is is why we next present the earnings in today’s currency. That brings up a critical point.
All the calculator’s inputs need to be in today’s currency. That is to say, the age of the person today, the college cost per year today (not when they will be attending college). The expected starting salaries for a high school and college graduate today. The calculator does all the escalations “behind the scenes” so you don’t have to figure out the average starting salary of a college graduate ten years from now.
The calculator also accounts for money the college graduate gives up by going to school. For example, the high school graduate will work for four years longer and earn money while the college graduate is running up college bills. That’s an opportunity cost for the college graduate that doesn’t apply to the high school graduate.
Interpreting the Results of Our Calculator
No doubt the final pay values and total earnings are interesting numbers; however, the most important numbers are the series of present value figures. By subtracting the present value of the high school earnings from the college earnings we can quantify the additional earnings created by going to college (in today’s dollars). The only thing left to do at this point is subtract the cost of a college education. After doing so we have an estimate of the net benefit of going to college.