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A Twenty Million Dollar Tale





I have a strong belief that a college degree is a critical component to financial success since we know that college graduates earn more income than their non-graduate peers.  It is a type of filter for future employers and begins when the student completes the eleventh grade and typically starts the college application process.  I would argue, however, the reasons that motivate people to attain their college diploma are the reasons they are more successful, and not because of the diploma.  If you’ve seen the movie The Wizard of Oz, there is a scene in which one of the characters, the Scarecrow, is bestowed an honorary diploma from a wise person called the Wizard of Oz.  It is a fantasy scene, because as soon as the Scarecrow gets his diploma, it seems he is instantly transformed from dunce to genius.  Like the Scarecrow from the movie, such is the fantasy about the college graduate.  The reality is the Scarecrow was wise, and Oz just confirmed it.  The reality is that colleges try to attract the best and the brightest, and these “pre-selectees” would do well in any environment.

Unfortunately, college is also a big business, and colleges recognize their value proposition is diminishing due to the rising costs and lower prospects amongst the lower tier of their graduates.  We’ve reached a tipping point.  What do I mean by this?  Let me say it in English.  There are lots, and I mean lots, of students attending college today who have no business enrolling.  They are simply incapable of higher learning.  They are capable of more learning, but not higher learning.  Higher learning has traditionally meant harder learning.  In our politically correct world of “everyone should go to college” and with the plethora of silly majors, we now consider higher learning and harder learning degrees as synonyms.  They are not.  You can’t compare an engineering degree from MIT with an “I partied” degree from a no-name college.  It is up to you to know what you can and can’t do.  Don’t invest a dime in a second-rate education.  If you do, the “returns” will be poor.  Higher education begins long before college, so don’t fall prey to unfounded optimism.

Back in 1976, my senior year of high school, we had a multitude of young people in this country.  We were the “future” of this country.  Years from now, the graduates of the class of 2150 will be the future of this country.  However, back in 1976, our guidance counselors were realistic.  They would look at Johnny or Sally with a 2.3 grade point average and below-average standardized test scores and tell us the truth.  They would say, “Johnny/Sally, perhaps you should enlist, or take up a trade or go to a community college part time or work construction,” or you name it.  Today we tell Johnny and Sally there is a college for everyone.  That is garbage, and everyone knows it.  It is the siren call of big business, and don’t kid yourself, colleges are big business.  They are expensive, and an “I partied” degree does not guarantee a higher paying income.

I am not offering a solution to the rising student loan problem in this country or the products of our high schools and subsequently our colleges.  I will leave that in the hands of others.  However, you as the person in charge of your money must understand the reality.  It is what it is.

So, why do people go to college?  College is certainly not the only path to financial success, nor is it a guarantee to financial success, but throughout time, it has proven to be a consistent, safe and reliable path.  It has provided opportunity.  This is the reason why so many immigrants, Cubans included, gravitate toward degreed professions.  Since most immigrants don’t come from wealth, it has traditionally been the best available path.

Let me digress a little and speak to personal family values.  I would never want to give the impression that I advocate avoiding college.  It couldn’t be further from the truth.  What I advocate is the wise purchase of a college education and the wise major as well.  Let me be specific.  My mother’s parents in Cuba had seven children.  They are all college graduates.  They had 17 seventeen grandchildren.  They are also all college graduates.  So far, every one of their great grandchildren who are 22 years or older are also college graduates.  To say that the history of my family is to believe in education is an understatement.  This doesn’t negate the fact that things change, and college has become increasingly expensive and less of a value proposition.  So, like any other major purchase, you must ask if it is worth the money and, if so, what you are really getting?  Is it a value?  It was a value, but is it still?

Let’s examine the facts.  I live in Maryland and have four children.  The cost to attend the University of Maryland is roughly $25,000 per year when you factor in all expenses.  This represents a $100,000 investment over four years.  What does this mean in financial terms?  The analysis is very simple.  You simply compare an alternative use for this capital, such as investing the money instead of paying for higher education.  The results are startling.  If you earned 4% on your investments, you would have more than $600,000 for your child when they reach age 65.  If you earned 8%, they would have over $3.5 million, and at 12%, almost $20 million.  Spending $100,000 on a college degree may or may not be worth it.  It may be if your child is wildly successful, but it’s highly unlikely.  You may ask why I say this.  The answer is obvious—most people aren’t wildly successful.  To see why I say it’s highly unlikely, just ask yourself how many college graduates retire with a net worth in excess of $5 million.  If the goal of parents is to make certain their child can retire in comfort at age 65, they would be much smarter investing the money in a low-cost stock index fund instead of a college education.  Low-cost index funds should return around 8–12% annually.  Forty-seven years after graduating from high school, the child of parents who invested in a low-cost index fund instead of higher education is worth between $3.5 million and $20 million, thus the title of this tale.

To make matters worse, I attended Johns Hopkins University, another school in Maryland, as did my only brother and sister.  The cost to attend Johns Hopkins today is approximately double that of the University of Maryland.  At a 12% rate of return on their investment, a parent could ensure that their child has almost $40 million at age 65 instead of attending a prestigious private school.  These numbers are compelling.

Can we glean anything else?  We can, of course, see once again the magic of compounding and that rate of return matters.  We can see that if you double the rate of return from 6% to 12%, you increase the ending capital by a factor of 13.  You will have approximately $20 million instead of $1.5 million.  But is there something else we can glean from this?  I think so.  I break it down into three categories.  The first is parents who can afford to pay for college and are aware of the magic of compounding.  The second is parents who can also afford to pay for college but are unaware of the power of compounding.  The third is parents who can’t afford to pay for college so they don’t have an alternative use for college funds because they don’t have the money in the first place.  Each group of parents sees the college value proposition from a different lens.

Parents in the third category see college as an opportunity for their children.  To them, college is a no-brainer.  If their child can go to college, they want them to attend.  The same holds true for parents in the second category.  Since they don’t understand the power of compounding, however, they are taken in by the propaganda that college graduates make more money, and to them college is also a no-brainer.  But what about the parents in the first category?  These parents are people like me, and most of my clients.  We know that college is a poor investment since we are the ones most likely to be able to achieve an 8–12% rate of return, yet we persist.  We keep sending our children to college.  We keep overpaying for education.  There are probably as many reasons for this as there are children in this category.  Perhaps we want our children to help humanity or seek some level of self-actualization they can only attain through the four-year process of attending college.  Perhaps it’s peer pressure.  In any event, parents in this category don’t send their children to college because college graduates earn more money than non-college graduates.  They have other reasons.

My advice to parents and children as they embark on the college selection process is that you must be jointly aware of the long-term financial implications of your decision.  Make sure your children knows what is expected and why.  Make sure they are aware of what they are giving up in terms of financial security if they attend college so that they take it as seriously as they should.  Let them understand they are potentially getting a $20,000,000 education.

Let me close by saying I realize the goal of college is to empower these young adults to make their own way for their own good and the good of their country.  Leaving money in a plan for them—without skills—is certainly not the goal.  This doesn’t mean parents and society should throw money where it serves no purpose.  The potential to succeed at a high level with difficult coursework is not for everyone.  Many incorrectly think higher education and college are synonyms.  It couldn’t be further from the truth.  The purpose of higher education is to train young adults who can think and write critically and orally defend their viewpoint with logic, conviction and persuasion.  This doesn’t have to happen in a college setting.

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