Wednesday, 26 February 2014

Is a (Second) Degree Worth It?

I have been asked to consider returning to further education to break out of my current vocational malaise. Several of my peers have done precisely that, hoping to capitalise on a future demand for medical services, and an immediate demand to not appear like unemployed bums to their family.

I take it as given that people with degrees command better salaries than those who do not. But does this make a very expensive degree worthwhile? We have heard of professional elites who are also skint. Poor doctors, lawyers in hock. How well does a professional degree translate to increased net wealth?

There are plenty of internet articles on soul-searching to find the answer. There are not so many on the hard finance of tertiary education. By far the best I have found is the College Risk Report, which compares the value of specific U.S. degrees with that of a high school education and a 2-year generic college course.

As comprehensive as it looks, the model has (to me) some weaknesses.

  • Although opportunity cost in terms of time to complete the degree is considered, cost of living while doing the degree is not.
  • The model deals with opportunity cost in terms of the time value of money lost vs cumulative earnings. I would like to go a bit further to see the difference it makes to overall net wealth.

Above is my comparison for how a degree, or second degree, impacts net wealth. I graph net wealth for 3 scenarios: Firstly, a graduate maintaining full time employment at a graduate salary. Second, someone schlepping away their entire life on minimum wage. Finally, an undergraduate - nominally a medical/dental student. This is localised to Australia but applies everywhere people pay money to get degrees to get jobs. Because of the extra extrapolation, I have had to make some assumptions:
  • The undergrad will have no income until after they graduate. My parents didn't allow me to work part time while I was studying, and I don't think I would have had the time!
  • Cost of living is added to the undergrad's debt. Many of my peers rely on the bank of Mum and Dad for their lifestyle, but ultimately the money is coming from somewhere.
  • There is no interest on the negative balance while studying, either from study or education loans. The varying interest rates are too difficult to accommodate.
  • Living expenses for all three scenarios are identical.
  • Once working, all three invest net income - gross minus repayments and living expenses - at an average rate of 7% p.a. This assumes a mix of asset classes.
  • No inflation or pay rises are taken into account.
Initial ConditionValueSource
Minimum wage$31,532.80Source: Fair Work Australia
Investment interest7.00%
Dentist Salary (Gross $73,000)$56,616.00Graduate Careers Australia, ATO tax calculator
Fees p.a.$10,065.00Sydney Uni – HECS-HELP
Living Expenses$18,610.00Department of Immigration and Citizenship
Graduate Wage (Gross $50,000)$41,712.00Graduate Careers Australia, ATO tax calculator
Degree length (years)5
It would seem that it takes about 19 years for the dental undergraduate to catch up to even the minimum wage worker. This may not be important for a school leaver, but will be pertinent to someone looking to change careers at age 45. To further dissuade second chancers, retraining even in a higher paying field will entail full financial sacrifice. There is no catching up to the net wealth of graduates who continue in their field.

It is now oft repeated that the decision to go/return to university is not wholly financial. While university can enrich in more ways than a higher probability of a higher salary, I think this is a marketing department response to the dissipation of that degree-job guarantee over time. Nevertheless, I owe my current state more to the extra-curricular aspects of my university experiences. I learned investing in uni, but not in Comp Sci or Law! (Though I did learn spreadsheets and corporations law in my coursework.) Would minimum-wage me know to build a diversified portfolio? Then again, would the neurosurgeon me?

One encouraging thing: a diligently saving minimum-wager will hit a million dollars within 30 years. They may be relatively worse off, but in absolute terms there is enough - if not plenty - for all.

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