One of the largest expenses for our children could be going to university. The main reason for going to university is to get a higher education which should lead to more opportunities and higher earning potential.
To rephrase this point, our kids will be paying (and likely borrowing) money with the hope of a larger return. This is a form of investing. The question I raise in this blog is whether or not it is a good investment given that the cost of university is expensive and is continuing to increase.
The cost of university has more than doubled in the last 20 years. This has led to both students borrowing more via student loans and some parents/grandparents giving up some of their retirement savings to cover the costs. In addition, the amount of interest that students have to pay on their student loans is higher than what it was when I was at university 20 years ago.
To start, let’s consider the reasons why people go to university.
Why do people go to university?
There are three main reasons:
It’s a requirement to get certain jobs
Larger opportunity set
Let’s look at each of these in turn
ONE: It’s a requirement to get into certain careers
To get into certain professions, it is a requirement to have a degree. Lawyers, doctors, vets and even actuaries (like me) all require a degree to enter the profession.
As the amount of time spent on training to join these professions is so high (even after university), there aren’t that many people in these professions so those that do them get paid well (supply and demand working its magic).
Therefore, if your child feels they want to work in professions which require a degree, then clearly going to university is necessary and likely to be a good return on investment even with the costs going up.
If these types of careers aren’t of interest to your children, then we need to consider other reasons why going to university might still be a good investment.
TWO: Larger opportunity set
Whilst some jobs might not require a university degree, it is believed that having a university degree increases your chances of getting a better job. A university degree shows that you have demonstrated a certain level of intelligence and commitment which many employers appreciate. Therefore, a degree can open up more doors for different careers and opportunities and a higher earning potential compared to those that don’t have a degree.
This is the area where the return on investment from going to university is not certain. Does the increase in opportunity and earning potential outweigh the cost of university? In the past, that would certainly be the case as the cost of university was relatively low. Today, the average student loan debt is around £40,000.
In the UK, many university students don’t earn enough to repay their student loan debt. This is what I find worrying. This means that going to university is a life-long additional tax for these people. The universities benefit financially but many students could be worse off.
Today, fewer companies are requiring a university degree as part of their application process. This includes companies like Google and Facebook. They believe that there are alternative ways in which they can test for intelligence and commitment without requiring potential applicants to have a university degree. This means that there is scope to get all the upside without the financial burden of student loans.
My view is that a university degree could lead to more opportunities and therefore higher earning potential but that is definitely not a given. Children should be aware of this. They should think carefully about the financial benefits of the new opportunity sets they are looking to open from going to university and whether these are going to outweigh the financial burden of their university debt.
I feel that a lot of people go to university as they don’t know what they want to do with their lives and feel that continuing education will give them more time to think whilst opening new opportunities. My view is that this approach needs to be reconsidered. The ‘more time’ argument is weak. ‘More time’ really means they need ‘more information’ and should seek this information. If they need more time, it might be better to work for a year to narrow down what they want to do long-term (i.e. earning money rather than borrowing money whilst they think about their future).
In the UK, more than 50% go to work outside of the field in which they studied!
THREE: Life experience
University can be a really fun time for people. It’s their first time living away from their parents and being independent.
I’m not going to deny this fact but given the high costs of university, this is very much a third or fourth-order priority. If teenagers don’t need to go to university for a particular career or don’t believe it will open new opportunities which have a large financial benefit, then arguably they would be much better off travelling around Europe or Asia for a few months to get a life experience rather than going to university.
How to increase the return on the investment:
If your child does consider going to university, the next step is to consider ways in which they can increase the return on the investment. Below are two areas which I recently discovered that I thought I’d share.
Going to the ‘BEST’ university might not lead to the best outcomes
The tuition fees aren’t always directly correlated to the quality of education or the university ranking but high-ranking universities have higher demand and therefore can have higher fees.
Two points here:
Rankings are based on prestige, not outcomes
Super competitive universities can damage confidence and happiness
To expand on this second point, if your child is doing really well in school and top of their class, then they might actually do better going to a second-tier university compared to the very top universities. This is all to do with statistics. The chances of being the top performer in a top university are low. If they aren’t a top performer in their university class, this could lead to stress and unhappiness (despite the fact that they are still in the top 5%) and increases the chances of burning out or dropping out. Going to a second-tier university means they increase their chances of being at the top of the class. This increases happiness and likelihood of getting top marks and higher earning potential, i.e. increase the return on investment.
I don’t believe everyone will agree with this but I found the insight super interesting and it will be something I will share with my daughters as they get older. You can learn more about this by reading the amazing book ‘David and Goliath’ by Malcolm Gladwell.
Another way to increase the return on investment from going to university is to reduce the costs. This can be achieved by getting a scholarship.
Until recently, I was very naive about scholarships. I thought they were only given to:
Families that don’t have the financial means to send their kids to university,
Sports stars who might not have all the grades to get into their desired university or
The very best students who excel in a particular field.
I was recently introduced to Nancy Paul, who wrote the book “The Little Book About Scholarships”. She told me all about how students can apply for many different scholarships and in most cases, they require the applicant to write a letter or essay about why they believe should get a scholarship. Nancy’s three daughters were awarded $600,000 in merit scholarships
Spending time writing these scholarship essays could be one of your child’s most profitable investments. It will also give them a really strong sense of reward, and extra motivation whilst at university as someone (or a company) is willing to provide them with financial assistance.
Should my girls decide to go to university when they are older, we’ll definitely be encouraging them to apply for scholarships.
Going to university can be one of the best ever investments but that is no longer a "no-brainer" for everyone due to the fact costs have increased significantly.
When it comes time for your children to consider university, more time should be spent considering the financial benefits of going. It might turn out that for their particular area of interest, they could open more opportunities if they got work experience or gained the skills in different ways (online courses), compared to going to university.
The default for my daughters is that they will go to university but this is on the premise that they have considered the specific benefits of going to university. I no longer believe in the sweeping statement that:
‘Going to university is better than not going’
... as that is not holding true for an increasing number of people.
The amount of student debt that is outstanding in the UK and US is scary and increasing rapidly. As average wages are not increasing by anywhere close to the same rate, there is a potential economic minefield as a result, i.e. avoiding student loans might not just be a good thing for the individual (if there aren’t clear benefits) but could also be good for the world economy at large.
Lastly, if your kids have entrepreneurial talent and want to set-up their own business then starting with large student debt is not a great place to be.
Thanks for reading.
P.S. Even if your children end up getting a top university degree, they will only really benefit from the higher earning potential if they know how to look after their money. Make sure your kids grow up knowing how to look after their money by gifting them a copy of Grandpa's Fortune Fables. Also, why not check out my online course?!