How do you know college is a good financial investment? | Investing 101
Making the decision to return to school as a working adult is difficult in today’s changing job market, with the risks of losing income and even going into debt with no guarantee that it will all be profitable in the future.
Those who have faced the choice say you need to consider whether the cost of your education is really an investment or an unnecessary expense.
Answering these six questions could help you find the answer:
Have you performed a breakeven or net present value analysis? That means dividing the total cost of your education by the total increase in your salary once you’re done, says Mark Brooker, dean of the DeVoe School of Business at Indiana Wesleyan University.
If the cost of your education is $30,000 and you plan to increase your annual salary by $5,000 per year, the break-even point would be six years.
You can also perform a net present value calculation to determine the lifetime impact of your decision, says Ryan Repko, financial adviser at Ruedi Wealth Management in Champaign, Ill., who returned to school for an MBA and a Certified Financial Planner designation. .
To arrive at this number, you take into account the income lost during your studies, as well as the annual costs of the program.
For example, a 30-year-old man starts a two-year full-time MBA program that costs $50,000 per year. He will give up his $90,000 salary for those two years, then expects to earn an additional $20,000 a year, with a 5% increase each year. Assuming he works until age 65 and inflation is 3%, the net present value of that degree is $567,568.
“Because the NPV is greater than zero, that person would proceed to graduate,” Repko says. “If the NPV is zero, he or she would be neutral on graduation from a financial perspective, and of course if the NPV is negative, it would be unwise to graduate.”
Can you go to school without losing income? You may be able to enroll in a program that allows you to continue working full-time so you don’t lose income on top of additional education costs, Brooker says.
Raluca Lozano chose online courses that allowed her to keep her job in human resources while studying. It can also help you reduce your living expenses.
“Spending a lot of your free time on your online course will also save you from spending money on entertainment or eating out by staying indoors a lot more,” she says.
Will you really get a better job? Try to determine if your investment in education will pay off with a better opportunity.
Enrolled agent Kristine Stevensen worked full-time for the federal government with an unfinished degree, but many of the internal promotions she wanted required either time in the service or superior academic performance. Going back to school was the quickest route.
She eventually graduated summa cum laude from Texas State University and progressed into departments with the potential for higher pay rates.
“It was a struggle, but a worthwhile investment of time and money,” Stevensen says.
Do you have the other qualifications you need to progress? Higher education is not a miracle solution, but it is part of a whole.
“Yes, an MBA could potentially connect you with future business partners, or training could help you get promoted,” says Kim Desmond, co-founder of software engineering education company CodingNomads. “But at the end of the day, you have to go out and get those results for yourself. A piece of paper with your name on it means nothing compared to the value you put on it.”
Can you avoid going into debt? Struggling with debt after you finish school can put a damper on any financial benefit. Lozano researched the price of his master’s degree extensively and saved before getting it online.
“Paying the tuition up front got me almost $1,000 off,” Lozano says.
“I focused my graduation on courses I knew my employer would pay for, I applied for grants and scholarships because of my low income and good grades, and I carefully selected a program that allowed me to convert professional and personal experience into credit hours per semester,” Stevensen says.
How long is the program? If you must go to school full time, the shorter the program, the better. This is because the opportunity cost of losing wages adds up.
“Take the traditional two-year MBA,” says Alexander Lowry, professor of finance and executive director of the master’s financial analysis program at Gordon College. “These are quickly falling out of favor. The opportunity cost is two years without pay. Add to that the cost of the program of around $140,000. There are very few jobs you can get after graduation. that justify the cost.”
Lowry says Gordon College’s accelerated one-year master’s program is designed to help working students land jobs that make financial sense for the $30,000 and less time required.
“Students know what a good investment is,” he says. “They know they need an advanced degree to get a management position in most companies, so they strive to get the right skills in the shortest possible time and at a fair price.”