|High tech graphics using PowerPoint|
For example...let's say that you want to go to school to get your biomedical engineering degree. You can go to a salary.com website to find out how much the average salary for a biomedical engineer makes. In Dayton, Ohio the median salary is $48,284. In my opinion, this sounds like a lot of work for a job that doesn't seem to make a lot of money. However, this is a starting salary. As long as it is something that you would like to do, then by all means go for it. But at what price?
Well, let's say you have three choices. Option A you get a free ride. Tuition, Room and Board is all paid for through a scholarship. Because you worked so hard in school and you were able to get this scholarship...dad is throwing in a new BMW as a graduation present...but only if you go to this school. The only cost is $500 a year for food. The school is a state school here in Ohio.
Option B is a more prominent state school in Ohio. It has National recognition because it has a decent football team (I'm sure if you were a Michigan fan you'd disagree). A scholarship is offered, but the total cost per year is $15,000.
Option C is a private university. Scholarships are still offered, but the cost would be $32,000 per year.
Weighing the options...for whatever reason the student decides on Option C. Why do they do this? Maybe his or her friends are going to that school. Maybe they liked environment better. Perhaps of the perception of prestige would give the student a leg up. Will this happen? Maybe...however as an experienced recruiter I can tell you that employers typically do not care what school you went to get your bachelor's degree. All they care about is whether you can save or make the business a lot of money, and you get along with others. They want the best person for the job...period. The proverbial...will you earn your paycheck?
Let's face the facts. Does it really matter which school you pick? The schools are all in Ohio. No school in Ohio has the same prestige as Yale, MIT, Stanford, or Harvard. It won't help you get your foot in the door like those schools might. If you want to increase your chances of getting your foot in the door...find someone who works for the company you wish to work for, and have them write you a letter of recommendation.
Time for some math. Over the course of 4 years you would spend $2000 for Option A (food), $60,000 for Option B and $128,000 for Option C (not including inflation or other factors). If you subtract your potential salary by costs and then divide by the cost you'll get a return on investment percentage. ($48,284-2000)/2000 = 2,314% return for option A. ($48,284-60,000)/60,000 = -19.52% for option B. ($48,284-128,000)/128,000 = -62.28% for option C.
Some return on investment calculators will use the entire earnings that you will earn over your career rather than one year of earning. That would give you a positive ROI, however the financial damage would already be done.
Clearly option A is the best choice financially...plus you get a new BMW. More importantly, if for whatever reason you decide to switch majors, or worse drop out of school entirely...you won't be heavily burdened in debt.
When I went to Wright State University for the first year my parents paid $10,000 for tuition and room and board. I thought that was a ton of money. This was one of the reasons why I joined the Army. I thought to myself...why should my parents have to pay for this?
After finishing the Army, I got grants to finish my degree, used my GI Bill and worked part time to pay bills. After graduating I got a job for $32,000 per year. This means my ROI was ($32,000-10,000)/10,000 = 220%. When I was able to get my current job, I had to pay for my master degree. The cost came out to be around $10,000. My increase in salary was $30,000. Again...taking ($30,000-10,000)/10,000 = 200%.
I have another friend that went to a private school and incurred about $150,000 in debt. They were able to get a job for $24,960 starting out. This is a return on investment of -83.36%. A huge problem with school debt are they cannot be forgiven. Meaning you cannot file for bankruptcy. Number two is you'll probably end up paying double. Meaning that $150,000 debt could be closer to $300,000 depending on interest rates length of time to pay off. You cannot get ahead if your return on investment for education in the first year is -83.36%. My suggestion is that you want your ROI to be greater than 100%. Otherwise, you probably are wasting your money.
The final factor would be opportunity cost. By spending money on option C you forgo other opportunities. If you invested $32,000 and was able to earn 10% for 40 years compounding the interest 1 time a year...you would have earned $1,448,296.18 at the end of the 40 years. If you take the salary of $48,284 x 40 years you'll end up with $1,931,460...something to think about. You can check out my MM - Calculator page to run your own compound interest calculations. Try not to get into student loan debt in the first place, and you'll be in a much better position in the future.