Key Takeaways
- A college degree usually pays off handsomely for graduates in the form of higher salaries, yielding a 12.5% annualized return on basic college tuition and costs.
- College beat the S&P 500 as an investment, earning higher returns than the stock index since 1957.
- College doesn’t pay off for every student: for about 25% of college students, the return averaged 2.6%.
New research shows that money spent on a college degree is a great investment by any standard.
That’s according to an analysis by economists at the Federal Reserve Bank of New York, who crunched the numbers on the costs and benefits of a college education. The researchers found that for the median graduate, a college degree paved the way for better-paying jobs, equivalent to a 12.5% annual return, above the 10.1% annualized return from the S&P 500 stock index since 1957.
The analysis by Jaison Abel, head of microeconomics at the bank’s research and statistics group, and Richard Deitz, an economic policy advisor, took into account tuition costs, typical levels of financial aid, and the “opportunity cost” of foregoing all the wages a student could earn by working straight out of high school instead of going to school.
Although the math works out favorably for most students, everyone’s situation is different. The investment didn’t pay off for every school and every major. Students who don’t get financial aid, those who attended more expensive schools, those who spent longer than four years to earn an undergraduate degree, and those who pursued majors that led to lower-paying careers saw less return on their investment, the researchers said in a separate blog post.
For example, engineering majors earned a median return of 18%, while education majors saw a median 6% return (although, as the researchers noted, many educators’ salaries are for working nine months a year). Overall, 25% of students got a median return of 2.6% a year for money they spent on college, making it a questionable investment, at least from a financial perspective.
However, the researchers found that college still serves as a gateway to higher-paying professional occupations, making it a worthwhile investment over a 40-year working career.
“The typical college graduate earns a return that easily surpasses the benchmark for a sound investment,” they wrote.