Determining If a College Degree Makes Financial Sense

by Rick Kahler

Determining If College Degree Makes Financial Sense photo

Whether you’re considering a first degree or going back to college for a second degree and a new career, use these guidelines to determine if getting that degree makes financial sense.

How do you know when the cost of a college education is really worth it? A lot of factors (both financial and emotional) go into making that decision. Weighing the pros and cons can be daunting.

Let’s consider a couple of examples that will help conceptualize the process of determining if a college education makes financial sense.

For traditional students getting their first degree

At the time of this writing, the cost of an average four-year education at Yale was around $240,000, and the average starting salary for its graduates was $55,000. The monthly payment on a student loan for that amount was around $2,420 or $29,159 a year. That equals 53% of the starting salary. There are a lot of other variables to consider, like potential scholarships that would lower the tuition or lowering the loan payment by stretching out the amortization period (which actually increases the overall cost). But given these facts, the answer to whether this education makes financial sense is a no-brainer. No, find another school.

At the South Dakota School of Mines, by contrast, the cost of an average four-year education was around $65,000 and the average starting salary was $68,000. The monthly payment on a student loan for that amount was around $648, or $7,897 a year. That equals 12% of the starting salary. The cost of this education makes complete sense.

For traditional students, my personal rule of thumb is don’t pay more than one and a half times the average starting salary of a job for the education to obtain it.

Related: Is Your Career an Asset?

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For non-traditional students looking to switch careers

For non-traditional students who are looking to switch careers, the calculation is a little more involved. You must weigh the salary you earn in your current career with the cost and net increase in the career you are considering.

A reader emailed me this question: “I have a bachelor’s degree in my chosen career and am unable to find a full-time, benefitted, permanent job. When is it no longer a good financial decision to not go back to college? I can pick up a degree in a different field for $8,000. If I am 12-13 years from retirement, is it worth it?”

The average salary for a job in her career field was $20 an hour or $42,000 a year. The problem was that she had not been able to find employment in her career field. She was only been able to find temporary jobs with earnings of $9.77 to $12.75 per hour.

Up to that point, her four-year degree had netted her around $12,500 a year. Her research showed that if she went back to school for two years, she could switch to a career field more in demand in her area and earn $45,000 a year. That’s $32,500 more per year. If she invested two years and $8,000 in education and then worked in her new career for 10 years, she could earn an additional $325,000 before retirement.

If she were to borrow the funds needed for her education and repay the loan at 4% for 10 years, her monthly payment would be $81 or $972 a year. That equals about 2% of her salary. Given these facts, going back to school makes clear financial sense.

Of course, financial factors are not the only ones to consider in deciding whether to invest in education. Looking at the numbers is essential, but it’s equally important to find a career field that suits your talents and interests. It makes no sense to spend time and money preparing for a career you don’t want. The most rewarding college investment is one that provides worthwhile returns in emotional satisfaction as well as financial success.

About the Author

Rick Kahler, MSFP, ChFC, CFP, is a fee-only financial planner and author. Find more information at KahlerFinancial.com. Contact him at [email protected] or 343-1400, ext. 111.