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How Higher Education Can Be the Worst Investment Ever

By , Money Morning •

Benjamin Franklin once said, "An investment in knowledge pays the best interest."

But nowadays, you would have to be delusional to assume that an investment in higher education will definitely pay off.

After spending copious amounts of time and money on a college degree, the graduate unemployment rate is a now staggering 14%. What's more, even those who have gotten a job often settle for work that's hardly commensurate with their newly-minted education.

That has helped to create a trillion dollar student loan bubble, with the average debt per student up 70% since 2004.

It calls into question whether or not a college degree is worth the investment these days.

Here are the facts, I'll let you decide...

When Higher Education Isn't the Best Choice

The College Board lists average tuition, fee, room and board charges for 2012-2013 at private, four-year out-of-state colleges as $39,518 annually. In all, that adds up to about $160,000 across all four years.

But let's say the average student (via savings/family contribution) can contribute a $50,000 investment. That would leave the student the option to go into debt for the remaining $110,000 confident that the knowledge and contacts made in school will yield a good job.

Those loans will be paid back in no time, right?

The truth is that's not usually the case...

According to a recent report by The Wall Street Journal, there were 284,000 graduates with a bachelor's degree or higher working minimum wage jobs last year.

Based on Labor Department data, that's double the number from 2007, and up 70% from ten years earlier.

Chances are our student is now holding a non-refundable, multi-thousand-dollar problem.

Here's why.

Six months after graduation, the loans come into repayment. If that cost is tacked on to an already lengthy monthly payment list of rent, auto, and health costs, students quickly end up in the red.

And if they want to start a family right away... well, you get the point.

According to a study recently released by global management consulting firm McKinsey & Co., what many of these students end up with is buyer's remorse. McKinsey & Co.'s mind-blowing survey shows that more than half of our college grads regret their decisions regarding higher education.

Meanwhile, four out of every 10 graduates from top 100 colleges could not get jobs in their chosen fields and are flat-out disappointed.

With half of our grads overwhelmed with debt and regret, it makes you wonder if students wouldn't be better off with a number of viable alternatives that are readily available.

The Higher Ed Alternatives

What are some potentially better ways to invest that $50,000?

How about starting a business? Heck, start a business, fail, and then start a new one.

According to Joel Peterson, Chairman of JetBlue Airways and graduate of Stanford Business School, "It's important to acknowledge that many of the key factors that contribute to business success are the ones you learn at your mother's knee, and that others can only be picked up on the front lines."

Starting a business from scratch, or franchising, or doing either of these ventures while also attending an affordable community college on a part-time basis seem like really great ways to maximize rewards from investment.

When running a business won't work, what about working for a good company in an industry the student wants to be in, anyway?

Sure, the would-be scholar might start out in the mail room; but that's 2-10 years that would've been spent going to school full-time that instead can be used for honing skills, gaining experience, networking, and climbing the corporate ladder.

And guess what? The company may pay for education down the road.

But the best part is earning a paycheck all the while. Total pre-tax earnings lost by a high school graduate attending college and not working for four years comes out to nearly $100,000.

Now that initial $50K higher education investment, plus any money being earned, could go toward purchasing a new house or starting a retirement account.

That means making equity and property investments when you're in your early 20s instead of late 20s or early 30s, which can go a heck of a long way. If you don't think so, try using this boiled-down retirement calculator.

For instance, if someone invests $50,000 for retirement at age 20 with a 6% annual rate of return, making no additional contributions, by age 65 that initial investment could grow to about $740,000. By contrast, all thing being equal except investing 10 years later, the end amount decreases to around $400,000.

Of course, we're not saying higher education is always a waste of time and money - but if it's not done carefully it can lead to playing financial catch-up for decades.

So we shouldn't allow tradition, hype, or easy access to financial aid dictate what our high school graduates do with the money set aside for education - the illusion that higher education automatically shifts socio-economic status is all but shattered.

For more on how higher education costs are hurting our nation's graduates, go to The Scary Reality of the Student Loan Bubble in 5 Charts

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