# What is the Asset Value of a College/University Degree?

I'll try to put some numbers to this later. There has been a lot of discussion about the current cost of education and about changes in wealth for each age group over time. If we considered education as asset which yields about 19.5 thousand per year for about 40 years we can put a dollar value to this asset:

Of course the true value of the asset will be less then this because risky assets aren't worth as much on average. However, as a starting point we can compute the present value of such an annuity:
http://en.wikipedia.org/wiki/Time_value_of_money#Present_value_of_an_annuity_for_n_payment_periods

and consider how much money we should deduct from the value of this asset for risk. Additionally, we must also consider weather the earning difference is due to the educational difference or simply the difference in ambition between the two groups of people.

Evo
Mentor

I'll try to put some numbers to this later. There has been a lot of discussion about the current cost of education and about changes in wealth for each age group over time. If we considered education as asset which yields about 19.5 thousand per year for about 40 years we can put a dollar value to this asset:

Of course the true value of the asset will be less then this because risky assets aren't worth as much on average. However, as a starting point we can compute the present value of such an annuity:
http://en.wikipedia.org/wiki/Time_value_of_money#Present_value_of_an_annuity_for_n_payment_periods

and consider how much money we should deduct from the value of this asset for risk. Additionally, we must also consider weather the earning difference is due to the educational difference or simply the difference in ambition between the two groups of people.

Well, a college education might result in better spelling, or at least the ability to proof read. These two things are extremely valuable in the job market.

MarcoD

Well, a college education might result in better spelling, or at least the ability to proof read. These two things are extremely valuable in the job market.

Which begs the question whether John has a college degree, since he puts so much faith in the, well, weather.

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MarcoD

Additionally, we must also consider weather the earning difference is due to the educational difference or simply the difference in ambition between the two groups of people.

On a serious note, from personal highly subjective experience as a college lecturer with a lot of exposure to industry: The difference between a bachelor and master degree seems to vanish with work experience, though bachelors are more prone to career changes where they'll end up doing something completely different since some of them get the degree but can't keep up in industry. A PhD is a major gamble, most people end up with good jobs, but it can be an all or nothing coin flip, except for those who are sponsored by industry to get one from a working position.

But this is a European view, it might be totally different in the US.

russ_watters
Mentor

The OP (and most analyses, such as what is in the article) utterly misses the problem. The article says:
The report said the average high-school graduate earns $25,900 a year, and the average college graduate earns$45,400, based on 1999 data.
Now it doesn't say if that's adjusted for inflation, but regardless: I started my first post-college job in 2002, with roughly that salary (again, with inflation their equivalent number may have been more or less) and my earnings have gone up pretty rapidly since. So how is it that I was able to start at average and move up rapidly from there?

I'm an engineer.

See, the problem isn't that too many people are going to college, it is that too many people are going to college and getting useless degrees. Also note: "difference in ambition" can't be used in my case because my job requires a college degree.

So for me, assuming I don't screw up horribly in the next 15 years, my degree will have been worth several times that article's estimate.

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MarcoD

I'm an engineer.

Yah, my observations only hold for engineers and people in the hard sciences too. I am in IT, so what I've seen are roughly a bachelor is okay, a masters is better, and a PhD can be damaging. In EE it seems roughly the same, where a PhD seems to have little benefit over a masters. In physics I don't know really, but I gather a bachelors doesn't make sense, a masters is okay, and a PhD is best. Whereas in chemistry a bachelors means a nice position as a laborant, a masters degree a good intermediate, and a PhD again risky but a good gamble at a high-end position.

These are generalizations over a very small sample though. (And roughly for industry. For teaching, anything goes but has some consequences for your paycheck/at what level you'll end up teaching; for academia, a PhD is mandatory.)

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"What's a Degree Really Worth?"

Like many other articles out there, this article only considers economical value of a degree while completely ignoring things like passion, satisfaction, social status.

While you need need to live within your means (i.e. not get an education that you will not be able to afford) but you should also not ignore what you are passionate about.

"What's a Degree Really Worth?"

Like many other articles out there, this article only considers economical value of a degree while completely ignoring things like passion, satisfaction, social status.

While you need need to live within your means (i.e. not get an education that you will not be able to afford) but you should also not ignore what you are passionate about.

I'm aware the worth of a degree extends well beyond what it is economically worth. However, there has been a lot of discussion on these boards about statistics and how to account for relative wealth differences between generations and age groups.

More people today have post secondary degrees so if we know the economic worth of a degree then I think it makes sense to try to account for the economic value of a degree vs the debt one gained to get a degree.

Sure a degree has many other values both to the individual and the society but we can consider this part of a degree to be to some extent consumption.

MarcoD

Sure a degree has many other values both to the individual and the society but we can consider this part of a degree to be to some extent consumption.

Well, at the same time, it sometimes seems at odds that people need to borrow a lot in the US to get a high degree whereas sometimes private companies are the ones who benefit the most.

The Internet is a prime example of this (often used by Noam Chomsky, btw.). This is a technology almost fully developed by public funds, and the debt of US PhDs also, of which the benefits almost go solely to the private industries. Looks a bit skewed to me, US PhDs getting in debt for the corporations to profit from that.

I'll try to put some numbers to this later. There has been a lot of discussion about the current cost of education and about changes in wealth for each age group over time. If we considered education as asset which yields about 19.5 thousand per year for about 40 years we can put a dollar value to this asset:

Of course the true value of the asset will be less then this because risky assets aren't worth as much on average. However, as a starting point we can compute the present value of such an annuity:
http://en.wikipedia.org/wiki/Time_value_of_money#Present_value_of_an_annuity_for_n_payment_periods

and consider how much money we should deduct from the value of this asset for risk. Additionally, we must also consider weather the earning difference is due to the educational difference or simply the difference in ambition between the two groups of people.

In business, an asset can be valued on acquisition (or replacement) cost and/or a good will/intangible value.
http://www.cliffsnotes.com/study_guide/Intangible-Assets.topicArticleId-21081,articleId-21080.html [Broken]

Accordingly, the cost of the asset less the amount of loans owed might not be a good measure?

Btw - will someone please correct the spelling of "College" ?

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Ive played with a few numbers in excel. If the equation isnt rewritten as on this page:
http://en.wikipedia.org/wiki/Annuity_(finance_theory)

it behaves bad numerically. There is a lot of uncertainty. It is quite a different story if someone makes 19, 000 more starting out vs mid way though the carrier. Interest rates can also make a significant difference.

To a student who borrows at a high interest rate, the present value of a university education is much less then it would be to a government who can borrow cheaply. For instance to a government that can borrow at say 4% would value the 19, 500 over 40 years worth $526,587.29 while a student who borrows money at say 10% would only value it at$190,691.49 and on top of that would lose those gains due to taxes.

If the annuity is growing fast and interest rates are low and negative then it is significantly in the governments interest to have a lot of people with post secondary degrees. Additionally, to the student there is a large amount of risk in a university degree but for a government a lot of those risks cancel out.

Opportunity does matter but the results are mixed. Well university/college graduates generally have higher rates of employment than people with only college, sometimes they lose job opportunities due to being over qualified.

Now with regards to the article, the numbers given in the article all sounded reasonable but there was a wide range of numbers given. This suggests a lot of uncertainty.

As a side note, do university graduates typically work for 40 years? If someone graduated close to 30 this would put them near seventy but if they graduated near 20 than 40 years of work would seem more reasonable.

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