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Key Takeaways
- A college degree pays off handsomely in the form higher salaries for graduates. This equates to a 12.5% return on basic college costs and tuition.
- College beat the S&P 500 as an investment, earning higher returns than the stock index since 1957.
- College doesn't pay off for every student: for about 25% of college students, the return averaged 2.6%.
A new study shows that a college education is a good investment.
According to economists from the Federal Reserve Bank of New York who crunched numbers on the cost and benefits of college education, this is what they found. The researchers found that for the median graduate, a college degree paved the way for better-paying jobs, equivalent to a 12.5% annual return, above the 10.1% annualized return from the S&P 500 stock index since 1957.
The analysis was conducted by Jaison Abel, head of microeconomics in the research and statistics group of the bank, and Richard Deitz. They took into consideration tuition costs, typical financial aid levels, and the “opportunity costs” of not going to school and foregoing the wages that a student would have earned by working right out of high-school.
The math is favorable for most students but everyone’s situation differs. The investment did not pay off for all schools and majors. Researchers say that students who do not receive financial aid, attend more expensive schools and spend longer than four year to earn an undergraduate education, as well as those who choose majors leading to lower-paying jobs, see a lesser return on their investment.
For example, engineering students earned a return of 18% on average, while education students saw a return of 6% on average (although the researchers noted that most educators earn their salaries by working nine months out of the year). Overall, 25% of college students received a median return on their investment of 2.6% per year. This makes it a questionable financial investment.
Researchers found that a college education is still a great way to get into a higher-paying profession, and it’s a worthwhile investment for a career lasting 40 years.
“The average college graduate earns an investment return that easily exceeds the benchmark for sound investments,” they wrote.
