The Diminishing Value of a Higher Education

mbaOnce a graduate degree was considered one of the most prestigious and pursued degrees in the world, and most would agree that it still holds its place. Twenty or even ten years ago, having a graduate degree did allow an applicant to stand apart from the crowd.  Now a graduate degree is almost as common as a bachelor’s degree, making it more akin to a minimum requirement.

If you are considering the pursuit of a graduate degree or if your children or grandchildren are considering the investment, there is hidden and potentially very high opportunity cost to doing so.

According to the National Center for Education Statistics (NCES), the average cost of graduate school tuition is between of $30,000-$40,000 per year. Figuring another $40,000 for boarding and books and an additional $20,000 for travel, living expenses and misc., the total 2-year expenditure costs can be around $200,000.  Keep in mind these are averages, not a top tier program.

However these are just the hard costs.  There are additional financial considerations to factor in. The largest is the loss of wages that are forfeited while earning a degree. At a hypothetical annual salary of $60,000, $120,000 in lost income has to be added to the previous tally of $200,000 bringing the grand total, for an average graduate degree to, $320,000.

But most students looking to embark on their graduate school journey don’t start with a cool $320,000 in cash.  The student often has to rely on student loans to cover the cost.  If the loan is paid back at an annual APR of 6% (money.cnn.com) over a 20 year period, the grand total for grad school climbs to over $550,000.

If the student is fortunate enough to receive help from a parent or a grandparent (or if you are the lucky one to foot their bill) $320, 000 would have to be removed from a savings or investment account.  If that money could have remained invested at 6% over 20 years it could have grown to over $1,000,000 ($1,026,283 to be exact). That $1,000,000 is the real opportunity cost of a graduate degree.

If you are assisting a child or grandchild with tuition, you may wonder what impact this would have on your own personal retirement.  Assuming the same ROI of 6%, the payment of $320,000 at age 65 would reduce available income by over $26,000 per year between the ages of 65 and 85.

If you or someone you know is planning on funding a higher education, knowing its true cost is the first step.  Contact us at Paradigm Life to have an agent help teach you how to analyze all the inherent costs not just in higher education but all the major purchases and investments you make.  Together, we can set up a plan to help reduce those costs thereby maximizing your benefits.