Does going to college pay? Answer isn't simple

Does it pay to go to college?

If you check www.collegeboard.com, you'll find a reassuring study showing that education really does pay.

Without considering the intangibles, the study shows that each additional level of education draws a higher lifetime income.

While the median high-school graduate age 25 and older earns about $26,000, the median college graduate age 25 and older earns about $42,000. That's an annual income premium of about $16,000, or around 60 percent.

Not bad, particularly when you consider that the difference also allows you to escape doing heavy lifting.

Yes, the college grad will spend years paying off loans. But eventually the earnings net of loan payments will pull ahead of the high-school graduate's. So, case closed. It may hurt to write the checks, or borrow, but college pays.

Well, maybe not.

According to the College Board, it takes 14 long years before the college grad's income, net of loan payments, starts to beat what the high-school grad earns. During all those 14 years, college doesn't pay. High school pays.

The real question is not which choice pays on an annual basis, but which choice pays on a lifetime basis? Which choice permits a higher lifetime living standard — a question the board conveniently doesn't ask or answer.

The answer depends on the costs of borrowing and the amount you need to cover. Today's student-loan rates are really high if you need to cover the full ride.

And the price tag for attending college is astronomical. The College Board approach to evaluating the economic value of a college education may overstate the benefits. If you take a consumption-smoothing approach, which you can do with financial-planning software such as ESPlanner, you can see how the cost of higher education interacts with factors such as your lifetime taxes, Social Security benefits at retirement, loan repayments, etc. And you can do it all in dollars of constant purchasing power.

Economist Laurence Kotlikoff at Boston University, the prime mover behind the consumption-smoothing software, examined the cost of borrowing to attend a private college. He found a number of factors reduce the actual economic benefit:

• When you earn more money, you pay more taxes and you pay at higher rates.

• When you earn more money, you'll also get less bang for your buck from Social Security. Lower-income workers receive a much higher benefit as a percentage of their earnings than higher-income workers because Social Security benefits are more progressive than the income tax.

• When you are eligible for Medicare, you'll be hit with the same progressivity. Starting this year, Medicare premiums are keyed to household income. So you'll pay more for the same benefits if you earn more by getting a college education.

• Forgoing four years of earning power while in college on borrowed money nearly evens the playing field.

Questions about personal finance and investments may be sent by e-mail to scott@scottburns.com or by fax to 505-424-0938.