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Thursday, February 02, 2006

The Present Value of a College Education

They say a person who goes to college earns an average of $1 million more in their lifetime then a person who doesn't.

With a good college education costing $40,000 a yr, thats $160,000 for a degree. If the average person graduates at 21 and works untill 65, thats a working lifetime of 44 years. Well if you could invest every year at the rate of 4.5%, then the present value of that $1 million is $144,172.76, or put another way, $144,172.76 invested at 4.5% a yr would become $1 million. So it could be said that a college education costing $160,000 is fairly valued.

But what if you can invest at a rate greater then 4.5%?

At 6% the present value is $77,000 which is the returns of the average bond investor
At 9% the present value is $22,554 which is the returns of the average buy & hold stock investor
At 12% the present value is $6,829 which is the returns of a good mutual fund
At 15% the present value is $2,134 which is the returns of a good investor
At 20% the present value is $328 which is the returns of a great investor
At 30% the present value is $9.69 which is the returns of legends like Buffet & Gates (maybe this is why he dropped out of college)

Suddenly $160,000 for a degree is not looking so hot.

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