Tuesday, May 20, 2008

Education Expensive? Try Ignorance!!

Here we are working through another week of finals at our campus. Many students are delighted to have their exams finished. Graduation is this weekend and there are many happy sons and daughters among us! Hurray for them (including my son)! On the other hand, I just questioned a student, who was waiting to speak to another professor, about the state of his semester and he replied, “I need help.” It appears that his dreams for a successful semester had run aground. His future at our institution is being questioned. He is concerned. He should be.

Why is education so important to this young man? The same reason it is important to you! His future depends on it. Like it or not, on the average, your Financial Success depends on achieving a quality education.

In 2006, median incomes (one-half the group above this income, one-half below this income) by educational level are as follows:

Educational Level for Americans, 25+ years

Median Income ($2006)

Less than 9th Grade

$ 20,901

9th to 12th grade, no HS diploma

$ 25,912

High School Diploma

$ 39,426

Some college, no degree

$ 49,691

College Graduate

$ 81,723

MS Degree

$ 88,422

Professional Degree


(Source: http://www.census.gov/hhes/www/income/histinc/h13.html )

It is clear to see that income increases with educational level completed. Moreover, not only are annual earnings greater, but overall life-time earnings are much greater. For those with a bachelor’s degree, in 1999, their lifetime earnings were calculated to be $1,667,700 compared to those of a high school graduate of $994,080. (Don’t try to tell me you couldn’t use the extra, approximately, $700,000 over the course of your life!) Source: http://usgovinfo.about.com/gi/dynamic/offsite.htm?site=http://www.census.gov/prod/2002pubs/p23%2D210.pdf

Taking the earnings by educational level, for 2006, and calculating the average real rate of return for sequentially greater levels of educational achievement is an eye-opener. (The real rate of return is net of inflation, so one could easily add 3%-4% to these numbers to compare them with alternative “investments”.) Those completing high school, compared to dropping out of school at eighth grade, would achieve an, approximately, 17.19% return on their educational investment. Those completing some college, compared to the high school graduate, would achieve a 5.14% real rate of return on their education, while those completing college, compared to those with some college, would realize a 7.77% real rate of return on their human capital investment (the phrase economists use to describe the act of learning and investing in experiences that have market value). (Source: Calculations by the author based on the 2006 income figures above with a constant age of retirement and the cost being the opportunity cost of earning forgone while in school.)

These rates of return make a strong case for earning your diploma - all of your diplomas. Moreover, the results do not depend on the race or gender of the person. (Yes, there are some downward biases to the earnings of minorities and women but, regardless, those with greater educational levels earn more than their counterparts without an education.)

If this doesn’t convince you, let me try the following and, when you read my words and study the figure, think about how this fact works to make it easier for you to achieve Financial Success. You simply work to increase your level of educational attainment.

Given current demographic trends and rates of educational attainment, the advantage of greater levels of education will increase – and soon! Why? Those with higher levels of education will become an increasingly smaller proportion of the population and that scarcity will add to the value society places on the educated (i.e., their earnings will increase!). The following table, from the US Census Bureau, demonstrates that between 2000 and 2020, the proportion of the population with each level of education decreases for all levels of education except those with LESS THAN A HIGH SCHOOL DIPLOMA.

BOTTOM LINE: education is your primary ticket to Financial Success.

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Note: Thanks for sending this to your friends and colleagues to increase the size of our distribution. Our goal is to help young people and their instructors, particularly high school personal finance teachers, better understand financial concepts that relate to real life. We hope that financially stronger individuals and families will work to improve the world for all of us. Good luck and may you find Financial Success!


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