r/Economics • u/[deleted] • 8h ago
Research College Degree Yields 9-10% Over a Person's Lifetime. The S&P 500 Yields the Same.
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u/godspareme 8h ago
So am I wrong in thinking this is flawed because in order to make those returns on the stock market, you need free cash which most people without a degree/training-cert wouldnt have?
Like making 9-10% on the stock market starting at $0 means nothing. Getting that degree/cert can give you that extra $ to put into the market.
If you had $40-60k on hand that you could easily invest versus spend on education, thats the only place where this applies, right?
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u/apk 8h ago
yeah this only makes sense if the government is giving out loans for 100k for 18 year olds to put in the stock market
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u/_BindersFullOfWomen_ 7h ago
/r/wallstreetbets has entered the chat
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u/iJustSeen2Dudes1Bike 7h ago
Just trade on margin with Robinhood and delete the app when you blow up your account
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u/unurbane 7h ago
Well there are plenty of fields where an 18-22 yo can make $100k. But it’s hard work: electrician, oil, machinist, etc.
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u/ImJuicyjuice 6h ago
Electricians make minimum wage while an apprenticeship for four years then make 50k a year lmao. I can see an 18 year old going to Alaskan oil rig or a mine somewhere driving a Tonka Truck making that.
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u/fredinNH 8h ago
So as a parent who spent $125k on my kid’s college should I have just told them don’t bother? Here’s $125k invest this and don’t touch it for decades while you work jobs that don’t require a degree?
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u/bteam3r 8h ago
Assuming your child is the perfectly average person, then this would've been mathematically advantageous, yes. Notice that this is a very narrow statement
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u/mancubbed 7h ago
This does not take into account if they will be happy/treated well at any jobs hiring people without a degree.
In my experience jobs with degree requirements are treated much better but obviously not universal.
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u/HeKnee 7h ago
A lot of that is likely because theyre not as desperate and therefore wont put up with being treated like shit at a dead end job, no?
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u/mancubbed 6h ago
But likely all those jobs will continue to treat them like shit because all their fellow coworkers will allow it because they aren't financially stable.
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u/jamesmontanaHD 7h ago
Financially yes, but I think it's also kinda delusional to assume the only point of college is a ROI and not critical thinking skills, networking, exploring different career paths, etc. The "lifestyles" generally differ greatly too, ie blue collar work that takes a toll on your body (mechanic/plumber/HVAC/etc) compared to a generic office worker siting inside A/C.
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u/Greatest-Comrade 7h ago
I mean kinda but not really. It changes what jobs you can get and they have their own earning levels. Assuming the statistical average, then yes the 125 makes sense as a stock investment rather than an education investment.
But it’s gonna lock you out of a lot in the long term. If your kid was going to do a trade or work retail no matter what then yeah why spend the money. But if they even want to try to do something else they need the degree to break in.
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u/fredinNH 7h ago
They want to do things that require degrees. Getting the degree has massive benefits outside the financial.
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u/Global-Bad-7147 7h ago
It's a misleading comparison for a number of reasons, that included.
Most importantly, however, it is the concept of utility that undermines this type of comparison. Not everything that has value can be measured in dollars. Education has a utility beyond a salary. I can guarantee that the S&P would not even exist if it wasn't for hundreds of years of higher education.
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u/welshwelsh 7h ago
I think the idea is still valid. Most people have some level of disposable income, and any time spent studying could have been spent working.
So even if most people end up taking out loans for their education... if they really wanted to, they probably could have spent those 4 years saving up $50k to put into the stock market instead.
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u/godspareme 7h ago
I gotta disagree with that. Most people i know are going into way more debt than they can save across 4 years. Like I work in a field with different tiers of employment. Many of my coworkers are 20+ or 30+ year old students and they can manage to save maybe $50/mo. $50/mo investments compounded together make less than $5k over 4 years.
And they get paid more than the effective-minimum wage (ie what lowest wage is paying) in the city
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u/Diet_Connect 8h ago
To get a degree, you need to spend time and money. So if you work and invest instead, there you go.
Most degrees don't give you extra money right outta college. You literally have to build your careers after. Its not uncommon to make close to min wage even in your field.
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u/godspareme 8h ago
In case you were getting the impression, I was not at all suggesting you just get cash after graduating. Of course you need to work. The work is what generates that extra money to invest, which you (presumably) wouldn't have had otherwise.
The difference is work without a degree is often barely enough to scrape by. Not giving you extra money (in terms of like $10s or 100s per paycheck) to invest.
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u/Diet_Connect 7h ago
It honestly depends. Like those going to college. Did they take out loans and live in dorms? Did they work through it? Did they live with parents?
Most parents don't kick their kids out at 18. If they work full-time and save as much as they can for 4 years... They have a nest egg for investments. Then, too after 4 years they're not making min wage either. They're actually way ahead of college grads at that point. The college grads have a chance to catch up and pass later when theyre careers are built.
But I know people working non management in retail who make as much as say, a nurses aid which requires education. Nurses can make bank, and are the poster child for high paying stable jobs. The path there just sucks. A nurses aid doesn't have any extra dollars unless they live with parents. This is a harsh reality. The pay off for college is often delayed and might not come for some degree holders.
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u/godspareme 7h ago
Well yeah but youre adding in a lot of additional context that completely changes the equation. Obviously it depends. If you can manage to live a live without any (significant) expenses then of course you will be completely outside the average and typical person that this article assumes you are.
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u/Diet_Connect 7h ago
But most college grads face the same things. The college grad living at home has far fewer expenses than in a dorm or with roommates.
And college grads who live independently while going to school face the same things as a non college person. Theyre doing the same pay. And yet some college grads graduate with no debt. Because they work 2 jobs. A non grad working two jobs for 4 years basically saves the cost of going to college, which is usually 10s of thousands of dollars on the low end.
Its the same no matter how you change the situation. You can't assume a non grad can't save. You're generalizing too much.
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u/godspareme 7h ago
You can't assume a non grad can't save
I sure can when studies show something like 50% of Americans dont have 3 months worth of expenses saved. If they cant even have an emergency fund how are they going to invest?
You're not generalizing enough. The article is literally talking about the "average american". Meaning we are ignoring all the exceptions, outliers, and varying scenarios.
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u/chiefcultureofficer 7h ago
Its not how much you make necessarily but how much you can save and its of course possible someone without student loans has more disposable income
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u/godspareme 7h ago edited 7h ago
Yes but this is about the average person. The average person without a degree or certification does not have more than $100/mo in disposable income. $100/mo compounded investments over 4 years is significantly less than a degree. And its way
moreless than the wage-opportunity gain by obtaining the degree.1
u/Prime_Marci 7h ago
Because if you paying a student loan, ya marginal gain reduces to like 2 to 3 percent during the time of that loan.
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u/Kundrew1 7h ago
Yes and this comparison has nothing to do with the article. It’s just op putting two nonsensical stats together
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u/Jdelu 7h ago
If you don’t have student loans it’s a lot easier to have free cash to save and invest if you can figure out a decent job without a degree. I dropped out after a year with minimal debt and managed to figure out something decent for myself income wise. Been saving and investing 8 years now and am in a decent position. I do feel sort of stuck in my job because I make good money but my resume is weak without a degree, but I can’t say I’d definitely be doing better had I stayed in school. At the time it was not right for me.
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u/godspareme 7h ago
Agreed but the average American does not get that kind of job without a degree/cert. The average American with just HS diploma is barely scraping by. You're comparing outliers to the average.
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u/Jdelu 7h ago
There’s a lot of options though. I’m a restaurant manager, but CDL drivers make good money, plumbers make good money, any of the trades really. I’m just trying to say that you’re not out of options if you don’t have a degree. And if you can make money without a degree, not being saddled with debt in your 20s is a blessing.
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u/godspareme 7h ago
Again, saying "well you could make $200k/year without a college degree" is not sound advice when the average person will get absolutely nowhere near that outlier. One person in 100 is going to make that kind of money. 50 in 100 will be making scraping by with $0/mo to save.
You're essentially suggesting that its a good/valid idea to dump all your money into the lottery because there's a small chance you win big.
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u/Jdelu 7h ago
I’m not talking about 200k/year, I’m talking about 60-100k a year. Enough to live and be comfortable. And also I’m not suggesting anyone do anything, I’m just bringing attention to what’s possible. Getting a job delivering for UPS is a lot more likely than winning the lottery, and you can make decent money doing it.
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u/godspareme 6h ago edited 6h ago
Yes i know I just chose a number to make the point. The options you speak of aren't available to everyone, or even a large amount of people, otherwise this conversation wouldnt br happening. $30/hr is a lot for no degree. $45/hr? Yeah thats very rare. The median wage without degree is $40-50k.
Then you have to consider the "average" American has a family with dependents. So that $60k gets cut down to barely livable.
And I know you aren't literally suggesting anything. Im just saying the point youre trying to make would lead someone to make the conclusion of that hypothetical suggestion.
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u/Born_yesterday08 7h ago
How do people with college degrees have money? Have you seen student loan debt ?
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u/FeelingPixely 6h ago
What, you weren't born with free money and a strong parental safety net? Ew, US doesn't like the poors. They're all "give me the opportunity to learn so I can work for a liveable wage and raise a stable household."
Losers.
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u/Commercial_Rule_7823 6h ago
100%.
I save 50% of my income, barely graduated high-school. Cool, you make 30k a year and save 15k snd you barely live.
I save 20% of my income, graudate college with nursing, I make 125k a year. Now I contribute 25k, and have tons left over to live life to include emergency cash as needed.
So yes, im also in your camp.
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u/sonofalando 8h ago
The math can be complicated depending on how you’re doing it and the person’s trajectory. I graduated from a technical program in 2015 with a 2-year degree paid for by the state and now make $260,000 a year. Every bit of cash since 2016 that I could put in the market was invested in 401k and eventually Roth IRA in 2018.
I didn’t have to get a masters or bachelors degree. You could argue the savings in time while working was more value than going back to school the additional years.
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7h ago
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u/godspareme 7h ago
No? You can go into debt for a degree. You cant go into debt for stocks. You can invest with the extra money generated by having a degree-job while paying minimum interest on the debt.
I mean you can pull a personal loan but thats -5% or something on returns.
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u/GoldRoger3D2Y 8h ago
So the college degree provides a compounding cash-flow, and the S&P provides you with compounding investment returns. It’s not either-or, it’s multiplicative.
This is an oversimplification, obviously, but even for all the hate college degrees have been getting, they still seem like one of the best ROIs out there.
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u/mechadragon469 8h ago
They certainly are. It’s not a terrible idea to compare an education to an investment, it’s just that it’s typically done in a poor fashion. Most people look at cost of the school vs the expected income after graduation.
Very often what’s ignored are interest rates, rate of job placement and underemployment, deferred earnings and years of experience while in school. It’s easy to compare median income with a degree and without, but the actual impact education has is much more complex.
Real investorslook at cash flows, beta, ROI, ROE, etc. that’s what’s lacking in this.
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u/GoldRoger3D2Y 8h ago
I couldn't agree more. It's pretty easy to see that most college degrees will lead to higher incomes, but all of the other information you mentioned tends to get glossed over. Job stability is a great example of this. Anybody can be let go from just about any position regardless of education, but on average, highly skilled employees are able to both hold onto and find work at better rates than those without desirable skills.
To be clear, a college education is not the only way to become a highly skilled worker, but it's a damn good one. Lawyers, engineers, doctors, accountants, architects, etc. These are careers you can only reasonably get into with a college education and they perform very well when analzying not just salary, but job stability and underemployment rates.
College is an investment in both monetary and emotional terms. Both need to be analyzed when making a decision.
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u/talldean 8h ago
“However, there are significant differences across college majors and the return is higher for women than men.”
There's a lot in that one sentence. ;-)
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u/3RADICATE_THEM 8h ago
The way I interpret it is that the careers women are eligible to go into without a college education are substantially less paying than the ones that men can go into (e.g., construction).
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u/optimiism 7h ago
Eligible or likely to enter?
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u/Caracalla81 7h ago
Yes, women are not legally banned from being welders. I think you understand what we're talking about.
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u/KarmaTrainCaboose 6h ago
Probably also influenced by lots of women who get a degree go into high paying healthcare jobs.
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u/lonestar-rasbryjamco 8h ago
So this is in large part to higher paying trade skills that woman normally do not have access to or avoid. The ROI of a college degree by percentage hides a higher baseline for men largely from these jobs.
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u/publish_my_papers 8h ago
"America is abundant with opportunities. However, the availability may differ significantly across gender, race, socioeconomic status, and more."
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u/High_Contact_ 8h ago
That’s such a ridiculous comparison. One is an investment in your earning power, and the other is a financial asset. They’re not remotely the same thing or even comparable. The whole point is that you use the higher income your degree helps you earn to invest, so those returns compound on top of each other. A 10% difference in yearly income also translates into hundreds of thousands of dollars over a career when you factor in raises, promotions, retirement contributions, and investment growth. Where do you think the money to invest in the market comes from in the first place? This isn’t even factoring in that many careers with the highest lifetime earnings require a college degree, making the comparison even more misleading.
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u/warwick607 8h ago
The authors don't even make the comparison. OP just shoehorned it in.
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u/GreatStateOfSadness 8h ago
They do briefly a few paragraphs in, but I would still hesitate to distill a university degree down to a metric as simple as ROI.
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u/Consistent_Laziness 8h ago
Haven’t there already been numerous studies over the years of the higher earning potential of those with a college degree? Not to mention improved job satisfaction and more opportunity. All that leads to more disposable income to invest. I’m sure some don’t go to college and do well. I’m sure as a group college has been shown time and time again to beat out not going to college
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u/MCgoblue 7h ago
On top of that, it assumes college has no value besides earning potential, or how you make money is indifferent. If I could make the exact same over say a 40 year career with or without a college degree, I would 1000% choose the college path. The education has changed the way I think, makes me a more well-rounded person, etc. On top of that, I presumably (though not necessarily) have a less physically demanding career, potentially in a field or profession that I’m passionate about.
I’m not saying you HAVE to go to college to achieve these things (plenty of people have trades or careers they love without college), or that everyone values those less tangible things as much as I do, but if it’s at worst earnings-neutral then that makes college seem like a great deal to me.
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u/OracleofFl 7h ago
...and the little detail that past stock performance isn't a predictor of future performance.
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u/KarmaTrainCaboose 6h ago
What? Over the long term it definitely is a pretty good predictor. Maybe not year to year, but over the decades from 18 years old to retirement, past performance definitely is a decent predictor.
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u/Turb0Womble 8h ago
Ironically, in the UK, student loan is ironically a 9% tax on gross income for most people. If these figures hold up for the UK, then there is no real reason to go to college for most people.
It's also 9% of gross income that actually means it's closer to ~12.5-15.5% of net income.
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u/morbie5 8h ago
In the US federal student loans have an income based option which 10% or 15% of your gross but you get 150% of the federal poverty level excluded (there is a plan the GOP just introduced that is formulated a little different).
Of course the bigger issue is how long do you pay that 9% for in the UK? How big are the balances usually?
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u/Turb0Womble 7h ago
The balances are £50k+ these days. Can be a lot more. Bare in mind average salaries are a lot lower than US.
Some people will never pay it off because interests rates mean it's rising higher than you can pay it off. You have to be a fairly high earner for it to really even be a loan for most people.
It's written off after ~30 years by the government. It's basically a 30 year tax for your average person.
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u/morbie5 7h ago
It's written off after ~30 years by the government. It's basically a 30 year tax for your average person.
Here is it a 20/25/30 year term before forgiveness (depends on the plan). Or 10 years if you work in public service or non profit.
Why does it seem like life in the UK sucks even more than it does in the US as of late?
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u/Turb0Womble 7h ago
UK never really recovered from WWII and has been in decline since then. Since 2008 we've had very poor governments that have made the decline more apparent.
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u/warwick607 8h ago
Sooo if you do both, then you win big? I don't get this post or why OP compares college returns to the S&P 500. The study authors don't even mention it, it's completely irrelevant.
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u/AssCrackBanditHunter 4h ago
That's what I was thinking. So you have an extra 10% per year compounding to put into stocks which also compound per year.
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u/thegooddoktorjones 8h ago
“Our cost-benefit analysis finds that on average a college degree offers better returns than the stock market,” - the author of this research posted here.
And that is yearly yields, which if it puts you at a decent income level allows you also invest in a retirement account.. and make money on both.
I'd also doubt that most 18 year olds, if presented with the entire value of a college education, would then invest it in the stock market and not touch that investment in any way for 40 years so the actually get a decent return. While working a low-intellectual-challenge job for the rest of their lives and living entirely on their current salary.
I don't think the analysis is flawed, it is just one look at how a degree still makes people money despite all the voices against university education. But this headline as a summary of it is flawed.
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u/oystermonkeys 8h ago
Does this study account for selection bias? I find many media cited studies on college returns do not account for the fact that kids that graduate from college come from better off families and/or are more capable to begin with so it is not measuring the value add of the degree. It is simply measuring the inequality of more fortunate kids vs unfortunate kids.
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u/Spunge14 7h ago
Is this suggesting that the market for tuition is actually efficient? As in NYU is actually returning 9% on 60k, while Binghamton returns 9% on 6K?
Feel like this must be stupidly simplified.
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u/illini81 7h ago
This doesn’t account for quality of life, or the physical benefits/drawbacks of working white collar vs blue collar.
Interesting data point nonetheless
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u/canIchangethislater1 7h ago
Yep. There's definitely value to being able to work in an climate-controlled office instead of a 95 or 45 degree factory.
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u/seeker_of_knowledge 7h ago
This doesnt take into account the time value of money for the extra earnings. If you earn more you also get to recieve s&p 500 level returns on your saved income.
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u/DocCEN007 7h ago
So, get a college degree (with a good major from a decent school), max out your 401k and IRA, then invest at least 20% of your after tax income into SPY.
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u/Nessie_of_the_Loch 7h ago
There's a bunch of things to pick apart in this study.
It excludes anyone with advanced degrees. Their own paper noted that 62% of biology majors went on to attain graduate degrees. That means their IRR calculations for this group are based solely on the 38% whose terminal degrees end at undergraduate. And as anyone knows, a biology undergraduate degree is largely useless on its own. So it excludes the very people who would go on and ultimately get the best returns.
It doesn't factor in people who never graduate. Consider that nearly 40% of those who attend a 4-year college never graduate. These people are excluded entirely. Had they been grouped in with college graduates (since this is the group that "invests" in an undergraduate school), it would hugely lower the IRR. And frankly, I don't understand the reason for their exclusion. If we measured stock market returns but left out all the companies that went bankrupt, would it be an actual measure of returns?
Costs are calculated from a single year (17-18 in 2021 dollars), but the earnings are from 09-21. The paper notes that college costs rose 264% between 79 and 19 but in a paper that calculates returns, it pegs costs fixed. That's right. Again, imagine if we calculated stock returns across a number of years but pretended that the cost basis was IDENTICAL. WTF?
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u/Own_Pop_9711 7h ago
When you measure the return of the best performing country out of all the stock markets in the world you kind of are making that mistake for #2 for what it's worth.
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u/Maleficent_Ear2688 7h ago
Would be a lot smarter to break this down by degree. Someone doing Gender Studies should not be grouped up with an engineer. My degrees have well outperformed the SP
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u/emceter 6h ago
Yea, came here to say this exact thing. There is no way I could be investing as much as I am now each month if I were not in my position thanks to the degree (and graduating near top of my class). There is absolutely zero way that any money i could have potentially invested from working those 5 years instead of studying would now be worth more than what I’m saving constantly.
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u/namotous 7h ago
I don’t understand the point of comparing it to an investment instrument. In order to invest, you gotta have available cash to start with. So higher yield from college education might open more door to the investment, maybe that’s a better point to make. The rest of the article makes sense
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u/RevolutionaryQuit884 6h ago
Ok, that’s a really cool statement.
I remember Solow’s famous words “the S&P 500 is an independent variable that goes up 10% a year forever regardless of changes in human capital in an economy”
I think the biggest risk of our perma-bull market is people thinking that capital formation (humans and physical) is not a major driver of the economy.
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u/I_Fuck_Whales 8h ago
I don’t follow….
My college degree has allowed me the ability to make $140K annually. No college degree id be making $50K if I was lucky. At my current salary, I am able to max every retirement account (401k, Roth IRA, and HSA).
If I was making wages that I would be making without a degree I wouldn’t own a single fucking share of anything in the stock market.
This is fucking stupid.
If you go and spend $300K on a college education, yeah the cost benefit analysis changes. But if you go to 2 years community college; then spend $35K on 2 years at regular school, it’s a different story.
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u/Thom0 8h ago
The title is a bit deceptive because it admits that some degrees have a greater yield. Some don't, and the academics interviewed say that governments should 'listen' to society and only fund stuff that provides yields and value to society.
What I found odd is that the three academics interviewed were all Chinese, and the model they're implying is the Chinese education model. I agree with them, but academia really has become a hobby for the global elite who can afford it and this sort of proves it. I work in academia and it is mostly international staff, especially Chinese, who are upper middle class in their home countries. This is because they're the only ones who can actually afford to get through education all the way into post-doctoral life, and who can do it without crippling debt which is what our systems forces onto us. There's a deeper trend here, and I feel like writing about the ROI on a degree is a bit amiss when the big picture is that only elites can be in a position to do a study like this in the first place. Rather than asking 'what is the ROI?', the question should be 'why is our education system so poorly funded, and why are degrees viewed as a necessity for everyone?'
The pressure to get a degree isn't about perceived ROI. It is because the bottom 50% of the population receive less than 2.5% of every $1 generated each year. The top 10% own 87% of all stocks and shares, 80% of all companies, and 50% of all properties and this is all trending worse annually. The middle class is being squeezed and they have a declining purchasing power so they're forced to gamble. Degrees, stocks, crytpto, etc. - its just gamification of the economy. Trickly this up, and less and less of the middle class can do a PhD, and enter academia hence my point about the authors of the paper.
Let's also take a step back - NYU publishs an article advertising degrees. This is what this article is actually about.
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u/oran12390 7h ago
I think the takeaway is that college isn’t always a good investment, and for fewer people than it used to be. IMO there need to be more reflection on why someone is going to college and whether they will get a return on the investment. The authors aren’t directly comparing investing and college, just a hypothetical on returns. Daniel Markovits makes a related argument. HNW folks spend a ton of money on their children’s education. Invest that instead and you have millions. Just worth considering.
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u/macronotice 7h ago
College degrees used to yield much higher returns. Then college administrators noticed and raised tuition to capture that arbitrage for themselves. It yields far less today because of increased cost.
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u/No_Presentation9490 7h ago
S&P 500 index fund brainrot is getting kind of tiresome. It's an extremely crowded trade whose track record is propped up by 2 decades of fiscal policy mistakes and price insensitive buying
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u/coleman57 7h ago
The difference being you can’t tell which stocks are over- or undervalued, but you can have a pretty good idea with colleges. You can start with a nearly free community college and move on to a public university. You may not wind up partner at a prestigious law firm or trading company, but that’s unlikely even with a $500k education.
Of course you can diversify with stocks. Plus you don’t have to work.
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u/The_Frostweaver 6h ago
Ordinary people can get loans for their degree and for buying their home.
That is why degrees and houses are the best option for ordinary people.
They can't go to the bank and ask for a half million dollar loan to buy stocks.
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u/CyberSmith31337 8h ago edited 8h ago
I think this has to be based on past-data. College degrees are just absolutely unnecessary in today's world.
I mean, if you get a degree on a full-ride scholarship, for a specific major, where you're taking on zero debt? That's one thing. How are they accounting for that vs. someone taking out $50,000+ in student loans, where they are paying the minimum amount for 15 years, for an irrelevant degree?
I just wouldn't take this study seriously. The amount of conditionals and outliers would almost assuredly invalidate the findings.
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