Message Font: Serif | Sans-Serif
 
No. of Recommendations: 8
boatgod2001: "Forbes is great at telling the truth about the
costs of college, The Tyranny of the Diploma was
an excellent article.

http://www.forbes.com/global/1998/1228/0120082a.html "


It is certainly food for thought.

<<political diatribe excised>>

:Forbes failed to calculate their assessment correctly, had they, the evidence against going to college would be more compelling. That's because Forbes failed to calculate:

1. The effects of the progressive income tax. This tax penalizes the benefit of education (supposedly higher income) to redistribute money
to those who don't seek education (call it the Democratic "ignorance is bliss benefit program"). None of your articles have ever taken this
calculation into consideration. If you invest money into tax deferred instruments that you would have spent on college, you get compounding
of the investment until you sell at retirement. Whereas, if you achieve a higher salary there is no compounding of the investment tax deferred because you are taxed every payday for the investment (the tyranny of the progressive income tax). Avoiding college then, is a sound way to provide for retirement through tax deferment.
>
2. Calculate the lost wage that those who are smart enough to go to college, can earn in the workforce. An hour in class or spent studying
is an hour not spent in the workforce. Your article titled The Tyranny of the Diploma did not calculate this effect, but your article concerning the MBA does. For argument sake, we'll consider 4 years in college spent studying and in class, to have a 1 to 1 ratio for time
lost that one could have worked (when in reality that is a favorable ratio tilted in favor of college. The time spent in class and studying
for four years may be equivalent to the time spent working full time 5.5 years)."


OTOH, you are playing very fast and loose with the numbers, too.

"I'd estimate going to college four years sacrifices about $80,000 lost income (what a high school grad with skills enough to get into
college, can earn immediately from graduation from high school. Let's presume at 18 a kid leaves high school to make $20,000 a year. His parents invest the $120,000 (the cost for room and board, tuition, meals, and other expenses-the average cost for a college education
according to the Forbes article) into government bonds paying 5% instead. By age 62 the value of that benefit will be in excess of $1 million ($1,078,062.90 to be exact)."


Assuming that the entire 120k is available to be invested when the child is 18, and that tax-free 5% CAGR is avaialble for 42 years, seem like might big assumptions to me.

"Let's presume the AVERAGE working wage for those 42 years for the high school grad, was $25,000. The non college graduate will have earned $1 million in their working career, most of which will be under the effective tax rate of 15% ($1,050,000 less the .15% tax paid on income). His total working career benefit then is:
>
In savings bonds at age 62 $1,078,062.90
>Earned income $1,050,000/15%
>tax consequence (-$157,500) $ 892,500.00
>
-------------
$1,970,562.90
>
Without consideration of taxes, to compensate for the $2 million above, a person would have to start making $5,975.50 a month salary immediately upon graduation from college at age 22 (taking from age 18-22 to get their bachelors degree), to EQUAL the benefit described above by age 62 (I used 2.5% continuing return on the $1.9 million, because wages were not saved and would not be compounded, while the bond values were, which were roughly half of the derived benefit)."


Ok. But 62 - 22 is 40 working years, $1,970,562.90/40 is $49,264.07 annually, or $4,105.34/month NOT $5,975.50. For SWAG approximation, round $1.97M to $2,000,000 and divide by 40, which is 50k/year. 50k/year is 4k/month + 2000/12 < $4,200/month.
>

"However, most of the $5,975.50 will be taxed at the effective progressive rate of about 30%.

So, to become equivalent benefit, you have to really earn:
>
>$5,975.50 x 30% (to overcome the progressive education tax) or an additional $1,792.65 per month."


You are confusing the marginal tax rate with the effective tax rate. Almost no one pays an effective FIT rate of 30%, and certainly no earning 50k/year pays an effective FIT rate of 30%.

Furthermore, there is no FIT marginal rate of 30%. For most people, it was 28%, but the recent tax act reduced that number.

In addition, you are not doing the math correctly. You do not multiply by the marginal rate; you divide by 1.00 minus the margianl rate (expressed as a decimal). For your example, as written, you would divide by .7 or $5,975.5/.7 = 8536.43/month (putting aside, for the moment the miscalculation in the monthly amount and the confusion between effective rates and marginal rates). If you had done the math correctly, if would have actually strengthened your argument, such as it was.

"What this means, put simply, is that the break even wage for a college graduate, relative to that of a high school graduate who goes to work making $20,000 a year, and whose parents invest money they'd otherwise have spent on college in a government retirement bond fund, is $7,768.15 per month which MUST begin at age 22."

No, for all the reasons cited above. $4,105.34/.7 = 5,864.77/month or $70,377.24 annually, being substantially less than the number you cite in the next pargraph, by $22,839.76 or off by a margin of error equal to 32.45%.

"In that article titled The Tyranny of the Diploma, Forbes calculates that 30% of all college graduates are earning equivalent to high school wages. It would be interesting to know what percentage of college graduates by age 22 are making less than $93,217 per year.
My guess would be that 99% of college graduates makes less than that entering the workforce, most probably never make that in their working career.

Be honest, be bold, just come to the conclusion that college has become so expensive, and the taxes so high for the few degree plans that pay
adequately to compensate for the time, effort and expense of going, that for almost everyone college is a terrible investment."


Well, it is unfortunate that most people view college as an investment; by that standard most people would be bette off never having children and they would accumulate so many more dollars -- no expenses to raise kids to 18 and no 120k needed to be spent for college or invested.

OTOH, I agree with your basic premise that college is not necessarily for everyone and that many people would be finacially better off learning a skilled trade or other skill set.

Regards, JAFO
(who views learning as its own reward and worthy of obtaining independent of figuring out how to make a living)
Print the post  

Announcements

Paying For School Guide
Trying to Tackle Tuition? The Motley Fool's Guide to Paying for School will help you fight those rising education costs.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.