The Cost of a Degree

Sep 10, 2009 by

Friends frequently ask me for advice on whether or not they should seek XYZ degree. Many people choose to get degrees for purely non-economic reasons; they are interested in the topic, or want to be able to obtain a job in a certain field. One cannot practice medicine without an MD or law without a JD, and it is next to impossible to get a top academic post without a Ph.D. Things get a bit dicier when it comes to various Master’s degrees and certifications. While this training can be useful, it typically does not give you the legal right to do anything. In cases such as this, it may make sense to evaluate a degree from an economic standpoint.

The cost of a degree can be broken down into the following components:

  • Tuition
  • Interest on debt incurred as a result of the pursuit of the degree (for people who must borrow)
  • Lost investment earnings that would have been incurred had the tuition been placed in an investment (for those who do not need to borrow)
  • Opportunity cost (income lost due to the time spent earning the degree)

The benefit of a degree has one component:

  • The incremental income provided by the degree over the period that the degree will be used

As the revenue provided by a degree is equal to the incremental income (the difference in income between having the degree and not having it) over the time that the degree will be used, it is always financially advantageous to get a degree earlier rather than later. For instance, imagine that a doctor fresh out of residency earns $200,000 per year, whereas a college graduate earns $50,000 per year. Dr. A decides to enter medical school so that he may finish his residency at the age of 30, while Dr. B enters medical school so that he may finish his residency at the age of 40. If both doctors attend the same medical school and residency, Dr. A will have $1.5 million more in lifetime earnings than Dr. B, as he will have had an extra decade of practice at the higher salary. Thus, timing matters.

The size of the incremental revenue provided by the degree depends on the nature of the degree itself. In fields such as business and law, there is enormous variation in the starting salaries of graduates. While the top programs are often advantageous to attend, the lesser programs may actually be a poor investment in that the cost of tuition and lost opportunities may outweigh any incremental income that will result from the degree. If you are earning $70,000 per year, and have the opportunity to attend an MBA program where alumni on average earn $80,000 per year, this “investment” may actually cause you to incur a loss. Say the tuition is $50,000 per year. Then, the cost of the degree is (2x$50,000 + 2x$70,000) $240,000. You would have to work for 24 years after finishing the MBA to earn back the cost of obtaining the degree. If you had to pay interest on loans incurred to earn the degree, it could easily take far longer. On the other hand, if the MBA came from a top institution where the average alumni earned $120,000 (instead of $80,000), the degree would pay for itself in under five years.

From this, I can conclude that to maximize the value of your degree:

  • Finish it at as young an age as possible
  • Attend the school where you are likeliest to earn the highest salary upon graduation
  • Don’t bother with the degree if its cost appears to outweigh its long-term financial benefits, unless you want it for non-economic reasons

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