School Choice

    When you get right down to it, there are only a handful of decisions in life that really matter. Who to marry, where to live, what job to take, number of kids, how to invest, and a few others. These decisions have a significant influence on what your path through life will look like. Bagholder has always believed it’s the big decisions that matter, get them right, and life is a bowl of cherries. Get them wrong, and suddenly life becomes, well, the pits.  Most of us are fortunate enough to get to make the big decisions as adults when we have a little life experience under our belt. This dramatically increases the chances of getting them right. Unfortunately, not all big life decisions are left to adults. One of the most important choices we make, we make as teens. Graduating High school brings with it a choice of going to college….or joining the workforce. For decades, society has pushed the idea that getting a college degree is the key to success and financial security.

Let’s investigate that Idea by considering a couple of twin Brothers, one of whom joined the workforce immediately after high school & one of whom went to college. We will call them Bob & Doug.

Bob graduated high school & immediately entered the workforce, where he earned the median (according to google) starting salary for a high school Graduate of a little over 40k. Bob realizes he will never have the earning potential of his college-educated brother, so he has to be smart with his money. This means living on 20k/year for a while & saving the other 20k. While many of you would scoff at the idea of being able to live on 20k/year - this is how Bag would do it: Here in Arizona, there are plenty of 4-bedroom homes for rent at 2k/month. Split that rent with his brother and two other friends, and his share becomes $500/month. Utilities split four ways, might cost $150/month. That leaves over $1,000/month for food, car & insurance. Meanwhile, if the other 20k/yr he is paid gets invested in a conservative mutual fund earning even a meager return of 6% a year - by the time his brother graduates college, Bob will have just under a 93k nest egg.

Doug graduated high school & immediately applied to a local (below national average cost) state school named the University of Arizona. According to their website, tuition, taxes, fees, books, etc cost over 19k/yr - or 76k for four years. Sharing a rental with his brother, Doug can also keep his living expenses at 20k/yr. But because he is a full-time student with no income, he is taking out student loans to cover both tuition and living expenses. So by the time he graduates, he has loans totaling over 156k…(76k for tuition + 80k for four years of living). Since Doug has a 4-year degree, he gets to enter the workforce making more than Bob. He earns the median (according to google) starting salary for a college graduate of $51,590/yr.

Bob (with four years of work experience) and Doug (fresh out of college) at the age of 22 both decide to get married. This means they will no longer be able to split life expenses four ways, they can now only split them two ways, with their wife. Consequently, they will be spending 40k/yr to live going forward, not 20k. This leaves Bob in a position where he can not save any additional money going forward - but at least he can grow his existing nest Egg.

The 156k of debt Doug has, even if financed at a below-market interest rate of 4.5%, will leave him a monthly payment of $1,000 for the next 20 years. Notice how the $1,000/month, or 12k/yr Doug spends on repaying his loan, leaves him taking home less than his uneducated brother Bob. Even though Bob’s take-home is slightly higher than Doug's (after he makes his loan payment), for the sake of simplicity, let’s just say they are equal. Doug has, dug himself quite a hole as he will be working until his early forties just to extinguish his debt, and get his “net worth” back to zero.

  Fast forward to the age of 42; after 20 years of payments, Doug has finally managed to pay off his student loans. He can now start saving that $1000/month he was making loan payments with, for his own nest egg. He does this religiously in the same mutual fund as his brother - where of course, he gets the same return. Assuming he works another 23 years (until age 65), that $1,000/month compounded at 6% will leave him a healthy retirement account of 570k.

Bob, on the other hand, never had any student debt. So the 93k he had when he was 22 has compounded at 6%/year for 43 years (until age 65). His nest egg upon retirement is 1.143 million - more than twice the size of his college-educated brother Doug’s retirement.

The interesting thing about the above story of Bob & Doug is how all variables have been removed. The two brothers are identical in every way but one. They have the same expenses. They both earn the median income for their corresponding educational level. They both earn the same return on their money. The only difference is one went to school where he racked up a 156k in debt - while the other saved money those four years. Another thing to consider is the 6% return they got on their investments. Had they invested in a mutual fund with a slightly better return of, say, 8% a year, Bob would retire with 2.5 million, more than triple Doug, who would have only 753k.

There are two lessons to be gleaned here. First, the power of compound interest is life-altering. Secondly, College Diplomas are grossly overvalued. Bagholder would admit that if you go to college to get a four-year degree in engineering or some in-demand tech field, it may be worth it as your earning level will be well above the median. But for most of you, graduating in debt up to your eyeballs, and choosing to earn a liberal arts degree (which does little more than qualify you to work as a Barista at the local Starbucks) - Bagholder would say this:

You’re a Hoser, eh…