Want to Earn A Million Dollars? Go to College !

Want to Earn A Million Dollars? Go to College !

  • August 6th, 2019

Want to Earn A Million Dollars? Go to College !

The popularity of state lotteries, sweepstakes, and casinos attests that many people dream of becoming millionaires. Each year, Americans spend more than $10 billion on state lotteries. But there is a way to acquire a million dollars that has less risk than playing the lottery: invest in higher education.

The Cost of an Education

Of course there is price for obtaining a degree, just as there is a cost for playing the lottery. Let’s see if the cost is worth the benefit. Suppose that a high school graduate who did not go to college could earn $6 per hour and worked 40 hours a week. That is an annual income of $12,480. What does it cost for him to go to college instead?

Suppose that college tuition and books amount to $3,000 per year. His food, clothing, and lodging may not amount to much additional expense, since our hypothetical student needs clothing, lodging, and food whether he is working or going to college. Moreover, research has shown that most college students actually work 20 hours a week in a part-time job. Thus, what the high school student is giving up by going to college is the opportunity to work the other 20 hours a week, not 40 hours per week. Finally, suppose it takes five years to complete the degree requirements. Under these assumptions, the cost of a bachelor’s degree, including the opportunity cost of not working 20 hours a week for five years, is $46,200. What can our student expect from such an investment?

The Financial Benefits of a Degree

In 1995 the average starting salary for all University of Alabama bachelor’s degree recipients (no matter what field of study) was $25,500. Let’s assume that our graduate is 23 years old upon graduation and will work until age 65 (42 years). If earnings, adjusted for inflation, grow at 1.17 percent a year (based on national averages), our student could expect to earn $1,415,000 over his or her work life. That’s 41.5 percent more than a million dollars. And, of course, some graduates may even earn more!

The Return on Investment

Now it is true that this income is received over a person’s lifetime, but that does not diminish the value of this investment. First, consider that student would have had some income even if he never went to college. We assumed that without a college degree the student would begin earning $6.00 per hour. Let’s say his salary would grow at an inflation-adjusted rate of 1/2 percent. (Actually, the data show real incomes falling for workers with only a high school diploma.) The student would have earned $675,000 over his 48 year working life. So the gain in lifetime income from obtaining a bachelor’s degree amounts to $739,384 in nominal dollars. Using the difference in the present values of these future income streams ($548,707) and dividing the gain by the cost of the education ($46,200), our student will earn the equivalent of a 24.7 percent average annual real rate of return on his investment in education.

Where can you find a better deal?