Is College Still Worth It?

A new study makes a compelling case that people who graduate from college will typically earn a lot more than if they didn’t seek out more education after earning a high school diploma.

The Federal Reserve Bank of New York crunched the numbers and found that accounting for the cost of attending college (tuition, fees, and foregone earnings while in school), the median graduate gets a 12.5% annual boost to their income compared to what they would earn if they stopped at a high school diploma.

That’s an even better rate of return than what stocks have delivered. But there are important caveats to understand that should help your family make the smart college choice:

Graduate.

The financial benefit only happens with a degree. Attending school and taking on debt for school without finishing can be a double whammy: you may lack the skills to work in a higher-paying job, and you still have to pay back the loans even though you lack the degree that employers may require or pay more for.

Finish in four years.

If you take five years, your lifetime return drops from 12.5% to an average of 9.3%. Take six years, and it’s down to 7%. The issue here is not just the extra cost of being in school those years, but the fact that you’re likely not working full time in those years, and even if you are, until you earn a degree, you aren’t going to have the credentials that will pay you more.

Don’t pay more than the net price for a given school.

Every school must publish its “net price.” This is the average out-of-pocket cost a family pays net of all financial aid. The return in this study presumed a student paid the average net cost. But averages are just that. If you attend a school that doesn’t offer you a good aid package, your family will likely need to borrow more, and that can be a long-term hit to financial security.

Parents must take the lead on setting up their family for college success.

The biggest issue, in my opinion, is making sure college is indeed something a child wants. It makes no sense to pursue something so expensive until you are ready. That’s not only how you learn the most and maximize the experience, but it also increases the chances of graduating in four years. Going to college doesn’t ensure a good return on your investment. Only graduating tilts the odds in your favor.

Focus on the right schools.

And by right, I mean good financial fits. I don’t want to hear about dream schools. The best schools are the ones that are so eager for a student to attend that they offer a generous financial aid package. Graduating with the smallest amount of debt is how you set yourself up for lifetime financial success. What’s an okay amount? Follow the guidance of college financing expert Mark Kantrowitz: total borrowing over the four years shouldn’t exceed what you can expect to earn in the first year of work post-college. Keep it within that range, and you should be able to pay off the debt within 10 years.