Tuesday, March 18, 2008

Investing in Education

There are several ways to estimate returns on investments in education, or other types of investments for that matter. One way is to compare wages between jobs using general workforce skills with jobs that need college degree skills. Compare wages for a certified teacher with a college degree to wages for a teaching assistant, for example.

Another way converts college tuition and expenses into an estimate of a minimum wage or minimum salary increase that will make college a paying investment. The process requires interest calculations because money paid for college tuition and expenses could be used to buy stocks and bonds or other interest earning assets. Tuition and expenses amounts to an investment in a higher paying job, even though college students may want to go to college for other reasons.

Suppose in-state tuition at public college is $6,000 per year each year for four years. In some states like North Carolina, the state tuition is reported as $3,886, while in others like Michigan it is $7,115. Some are above, some below $6,000, but we let $6,000 be a representative tuition for 2007. In the first year $6,000 invested in stocks and bonds would earn interest or dividends. Similarly in the second year, except $12,000 would be invested and the second year earns interest or dividends on $12,000. At the end of four years at the time of graduation the principal invested and the interest earned is a total amount, which will equal $27,230.82 at 5 percent interest.

The principal amount of $27,230.82 earning 5 percent interest over the next 10 years and compounding monthly will be equal to $44,849.42. Start at graduation and $288.82 of extra income each month over the next 10 years using 5 percent interest will also be the same $44,848.63. The $288.82 equals the minimum extra monthly earnings necessary to pay for a college education at an interest rate of 5 percent. Using a forty-hour week and 160 hours a month it is less than $2.00 an hour of extra wage and salary that pays for college. Nothing is a guarantee but expect college to pay.

Our thanks for these calculations go to the built-in spreadsheet functions on MS Excel. Experiment yourself. Use the Excel help file under FV, which is the future value function. The spreadsheet entries above are =FV(.05/12,120,0,-27230.82,1) and =FV(.05/12,120,-288.82,0,0).