June 30, 2022 Financial Planning 0 comment

Education Planning

To help plan for the costs and potential benefits of education, we used four different plans which include a no college plan, an in-state public college plan, an out-of-state public college plan, and a private school college plan. The goal was to summarize the estimated total costs per year, estimated total earnings until retirement, and the cumulative savings when invested to then compare each of these final numbers and evaluate the best possible plan for any family. All initial values such as starting salaries and price for the different colleges were based on average values.Below were some questions we used to help describe this analysis.

  1. What is the lifetime income advantage of going to college versus not going to college?

When analyzing the average income earned from attending college versus not, there is a drastic difference in their lifetime savings. In a hypothetical scenario where someone who does not attend college earns $15 per hour and works the average amount of hours per year at 1768 hours, they would earn about $26,500 at the age of 18. When we compound that amount by 3% until retirement, at the age of 65, the estimated lifetime earnings totals about $2.768 million. However, when compared with the average lifetime earnings of someone who attends college, the earnings are significantly higher. The average starting salary after graduating from a public college was about $55,200 at the age of 22. When compounded at 3% until retirement, again set at age 65, the total estimated lifetime earnings comes out to about $4.872 million after college is paid off, assuming no loans were taken out. Even further, if we compare someone who attends a private college, it was found the average starting salary was slightly higher at about $59,400. Using the same rate of 3%, when compounded to age of 65 the average lifetime earnings totaled $5.142 million after college is paid off, also assuming no loans were taken out. 

  1. If the money spent on college was instead invested, how does that compare to the excess savings generated by a higher income for college attendees?

The total cost for all 4 years at each of the college plans were about $41,600 for in-state, $90,800 for out-of-state, and $152,800 for a private school. Hypothetically, if each of those amounts were saved from ages 1-18 and then invested until age 65, compounded at 5%, the cumulative savings would have been about $411,600, $899,400, and $1.513 million. When comparing the excess savings generated by a higher income for public college attendees, it was found that the amount saved was about $4.865 million for both in and out-of-state public colleges and $5.688 million for a private college. It is clear there is a significant benefit of attending college when comparing the cumulative savings for each option. For reference, these numbers were calculated by subtracting the starting salary after graduating by the salary expected at 22 years old from someone who did not attend college and then was multiplied by 75%. This percent was used to estimate the after tax savings value. Then for each year after, the same equation was used, plus the previous amount was added to make it cumulative. Each of these values were also compounded by 5% until the age of 65. Furthermore, when comparing the public college plan to the private college plan, we used the same equation and found the cumulative savings for a private college is about $253,000 greater than the savings for a public college.

  1. What is the income breakeven level that justifies public college vs. high school and private college vs. public?

The breakeven point between each of the four plans is based on the starting salaries post-graduation. When using the “no college plan” salary, compounded at 3%, the starting salary for someone graduating from an in-state public college would need to be about $31,570. Essentially this means that unless someone graduating does not have a starting salary of at least $31,570, attending an in-state public college would not be economically worth it. For someone graduating from an out-of-state public college, the starting salary to break even after all expenses would need to be slightly higher than in-state at $32,150. Lastly, for a private college the starting salary to break even with someone who did not attend college would need to be about $32,850 after all tuition expenses have been paid. When comparing public to private schools, the starting salary after graduating a private school would need to be about $56,500 to breakeven with the average lifetime earnings of a public school graduate. It should be noted this value is significantly higher than the necessary public school initial salary, and is about $1,000 over the national average starting salary.