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Why skipping college means losing $830,000 in income

By Aimee Picchi/CBS News 1:02 PM May 6, 2014

Going to college is a pricey affair for many families, given that annual tuition and room and board now costs almost $23,000, or six times the outlay in 1980. That has prompted even the likes of billionaire and former New York City Mayor Mike Bloomberg to advise students to skip the quad in favor of a trade, like plumbing.

But a new study from the Federal Reserve Bank of San Francisco is calling some of that advice into question, given its findings that college degrees actually gain in value over time and still remain a good investment, even when accounting for higher tuition.

The study, which compared earnings over time from college graduates versus those with only high school degrees, found that the average student recoups her investment in a 4-year program by the time she turns 40. After that, her higher lifetime wages will provide a significant return on her investment. By the time she retires, she’ll have earned $830,000 more than a high-school graduate.

“Although there are stories of people who skipped college and achieved financial success, for most Americans the path to higher future earnings involves a four-year college degree,” wrote associate director of research Mary C. Daly and research associate Leila Bengali in the report, published Monday. “Once the investment is paid for, it continues to pay dividends through the rest of the worker’s life, leaving college graduates with substantially higher lifetime earnings than their peers with a high school degree.”

Interestingly, the study considered the premium that college grads earn compared with their cohorts over time, or how much students graduating in, say, the 1950s and 1960s have earned since graduation day. Premiums pick up over time, which means while there’s an income gap for college versus high-school grads from day one, the disparity is even wider just 10 years after grabbing their diplomas.

For instance, people who graduated college in the 1990s and 2000s entered the workforce earning $5,400 more than people in the age group without college degrees. After 10 years, that gap had grown to $26,800, the study found.

“This evidence tells us that the value of a college education rises over a worker’s life,” the authors note.

But what about the rising cost of college? After all, the cost of an undergraduate degree has surged more than 500 percent since 1985, compared with a 121 percent jump in the consumer price index over the same time. With that out-of-proportion surge, does it still make sense, especially for younger students who are facing those higher costs?

Actually, yes, thanks to those higher lifetime earnings, the study notes. There is a caveat, however: it figures that the break-even point will take 20 years, given an annual tuition rate of about $21,200, which is low for some prestigious colleges. But, the authors add, “there is no definitive evidence that [high-cost colleges] produce far superior results for all students.”

The bottom line? A college degree pays lifelong dividends, but you may want to think long and hard about degrees that cost above the norm.

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