The True Cost of College

Student loan debt is now larger than consumer credit card debt at well over One Trillion Dollars.

Couple this with the fact that Americans aged 24-34 are the second highest age group to file for bankruptcy over the past two decades and you start to get a truer picture of the cost of college.

But the picture isn’t complete until you throw in this fact that “The Bankruptcy Prevention and Consumer Protection Act” of 2005...a high bred law developed by then President Bush and then Senator, but now Vice President Biden, and you have a situation that spells disaster for our young college graduates.

The typical undergraduate borrows $24,000 to attend college.  Many borrow more than this, some less, and a few don’t borrow anything at all but instead pay for their college with cash like I did.  So typical is not really typical, but more like average.  And averages work like this: 

• Say for instance that Bill Gates and I have an average net worth of over $26 Billion.  Knowing that Bill Gates’ net worth is over $52 Billion what does that tell you about my net worth? 

Currently the average person receiving an undergraduate degree can earn 10% more than someone without an undergraduate degree, so consider what their time in college truly cost.

According to the Federal Government, the median household income in the United States is $46,326.  (By the way, this means that almost half of American households live on less than $46 thousand a year.  And only 34% are known to gross $65,000 per year.  This leaves 17.8% grossing over $120,000 and less than 2.6% grossing over $200,000.)  Now take the median household income and divide it by two.  You should arrive at $23,163.  This $23,163 represents the income for each spouse in a double income family today.  

Now 10% of $23,163 is $2,316 and when you add these two numbers together, $25,479 that is median annual income for a person holding an undergraduate college degree.   This would allow an individual to earn $1,070,118 during his/her life time not adjusting for inflation.

Of course, the median non-college graduate will have earned $1,065,498 during this same time period because he/she was able to work during the additional 4 years while the college graduate was attending college.   So the college graduate earns $4,620 more than the non-graduate over a life time.  Yet the average college student loan of $24,000, even at a low rate of 6% over 20 years, will produce a required payment of $171.94 a month.  This means that the college graduate will spend $41,266.43 ($171.94 x 240) more than the non-college graduate over the next 20 years guaranteed because remember, thanks to Bush and Biden, that student loan debt can no longer be eliminated through bankruptcy.

So the true cost of college is $41,266.43 minus the extra $4,620 of increased income which might be earned by the undergraduate degree holder.  This represents a loss to the college graduate of $36,646.43.  Just a side note...that loss represents $11,646.43 more than the average person is able to save in their taxed deferred 401K by the age of 65.  Ouch!

But the good news is this.  If you realize that the $36,646.43 liability of a college undergraduate degree is not for you. Then use the $24,000 that you would have spent at college and purchase a participating whole life insurance policy.  This will cost you about $3,429.00 a year from ages 18 to year 25.

After these 7 years you wouldn’t have to pay any more premiums out of your pocket because the policy will surrender paid up insurance to meet the premiums required.  (Not my usual recommendation, but it works well for the comparison in this example.) You will have over $789 thousand dollars of Face Value in that policy at the end of year 8 and over the course of your life time this Face Value will grow and become greater than $800 thousand by the time you reached age 65.

Because cash values in a whole life insurance policy are designed to equal the face value at the time the policy endows your cash values at age 65 will be greater than $346 thousand.  Having $346 thousand to use as you see fit at the age of 65  would make you 14 times better off than the average wage earner in America who has been contributing annually to their 401K over the past 40 some years and only has $25 thousand saved up.

But you can make it even better than this!  What if you borrowed against your cash values at the age of 30 and purchased a car for $30 thousand dollars?  By using the borrowed money you can pay cash for your car then by paying your policy loan back as if you had borrowed that money from somewhere else to finance your car you’ll really be increasing what you’ll have available to use when you are retired.  At 6% interest on a five year loan this would only be $580 per month for your car payments.

But at age 65 you’ve been purchasing a new $30,000 car every five years and your cash values in your policy have grown from $346 thousand to over $349 thousand.  On top of this your policy face values have grown too and are now over $800 thousand.  Because of what you have accomplished in controlling your own money you will now be able to withdraw from your policy $20,000 a year from age 66 to age 86 and still leave a death benefit to those you love of over $265,000. 

When you consider that the average retired individual in this country lives on 80% of what they’ve earned annually, that $20,000 from the policy is providing you with a better than 3.5% increase over the average wage earner.   Which means... you’ve enjoyed a better life, you haven’t lost the use of money given to a 401k contribution each and every year, plus retirement just got better too with that 3.5% raise.

So what is the true cost of your college degree? How about for your children?  Is the $4,620 of extra income you could earn over your life time worth the 4 to 5 years you’ll spend on campus?  Or would you rather have $349,000 at age 65 and not worry about the $25,000 that could be in a 401K?  What do you think?  Will you choose the $349,000, the $25,000 or the $4,620?  Pretty tough choice, isn’t it? 

Author’s note: Please understand that I am not against obtaining a college education.  But I am suggesting that the pursuit of a college education should not be based on the idea of producing greater income during one’s lifetime.  Coupled with the fact that most student loans are given by the government and not subject to bankruptcy laws causes for some reflection as to why schools and government agencies alike are currently promoting higher education with a passion. Whose income is really at stake here?  Something to think about.

 Tomas McFie

*All labor, income, student loan, and 401k statistics are taken from “The U.S. Census Data.”