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Thursday, December 30, 2010

The risk of attending college

We don’t generally talk about the risk of attending college. But it is a big investment for the individual, his parents, and taxpayers that subsidize the average college student at least $10,000 per student per year (via guaranteed student loans, state and federal grants, state subsidies of colleges and tax deductions for donations to colleges). And big investments involve risk and reward. A college education is no sure thing even though we frequently here much more about the rewards than the risks.

Two alternatives to college are for junior to work right after high school or start his own business. Why is it risky for junior to experience real work and the business world before he enters academia?

The analysis is quite different for college entrants than they were for my grandfather when he headed off to UC Berkeley in 1917. Few high school grads back then had a chance to attend college, and college graduates were a rare commodity. It didn’t cost nearly as much (relative to the cost of living), virtually nobody borrowed to attend college and those families wealthy enough to be able to afford this luxury were already in the top economic tier. My grandfather graduated in 1921 with no debt and a head start over his high school mates that had worked on the farm during the same four years.

But today the college “investment” is different and far riskier. Here are the three main risks involved with going to college today right after high school:

1) You won’t finish. Today only about half of those entering college have graduated within six years. (If you graduated in the bottom 40% of your high school class and went to college then 76% won’t earn a diploma). For college students who ranked among the bottom quarter of their high school classes, the numbers are even scarier: 80 percent will probably never get a bachelor’s degree or even a two-year associate’s degree.

2) You will pile up far too much debt to pay off your student loans with the rewards of the college education you have earned. Americans now owe more on their college student loans than on their credit cards.

3) You studied a “fun” or interesting degree rather than one in demand in the job market. So you have graduated but no one but the fast food chains want to hire you. Modern Dance or Sociology sounded interesting when you selected your major as an 18 year old but no one ever warned you that after all the time and money you invested in earning your degree, you were destined for poverty.

Perhaps the lesson today isn't that you shouldn't go to college, but that you should approach it like you would any other investment: with caution.

“It’s a very risky investment,” said Laurence Kotlikoff, an economics professor at Boston University and president of Economic Security Planning Inc., which makes financial planning software.


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