Increased earning income from
bachelors, masters and doctoral (PhD) degrees
Education Tips by Burleson Consulting
If you are interested in the value
of education, make sure to see my related notes on the
costs of professional school and the
numbers of millionaires in the USA.
What college worth?
With the costs
of college increasing rapidly many students question the increased lifetime
income from pursuing a masters or doctoral degree. Here is a survey of
article that discuss the improved earning power from masters and PhD degrees.
Masters, Doctorate and Professional earn millions more
In this US Government article titled "Lifetime
Earnings Soar with Education: Masters degree worth $2.5 million income over a
lifetime" we see that advanced masters and professional degrees are a great
investment, and those who pursue post Bachelors degrees can earn millions of
dollars more than those with a BA or BS degree:
- High School Diploma - High school
graduates can expect, on average, to earn $1.2 million in lifetime income.
- Bachelors degree - Those with a
bachelor's degree, $2.1 million over a lifetime:
- High School to Bachelors - That average value of a 4-year
degree is increased earnings income of $900,000, almost a million
- Masters degree - People with a
master's degree earn $2.5 million:
- High School to Masters - Going from High school to a masters
degree is worth $1.3 million dollars.
- Bachelors to Masters degree - A Masters is worth $400,000 in
additional lifetime income.
- Doctoral degree - Persons with
doctoral degrees earn an average of $3.4 million during their working life:
- High school to Doctoral - Doctorate earn a whopping
$2.2 million dollars more than a High School graduate.
- Bachelors to Doctorate - Doctoral degrees earn $1.3 million
dollars more than a Bachelors degree.
- Masters to Doctorate - Doctors earn $900 thousand more than a
Masters degree holder.
- Professional degree - Those with
MD or JD professional degrees (medicine, law) do best with an average of $4.4 million dollars in
- High school to Professional - Professionals can expect to
earn $3.2 million dollars more than a High School graduate.
- Bachelors to Professional - Professional doctoral degree
holders (MD, JD) earn $2.3
million dollars more than those with a Bachelors degree.
- Masters to Professional - Professional degree holders earn $1.9 million
dollars more than a an average Masters degree holder.
The effect of college major on lifetime earnings income
Everyone who has been to college knows that if you cannot succeed at pre-med or
engineering, students fall-back into Business Administration or Nursing.
If they fail in Business or nursing they pursue liberal arts or social science
(i.e. Psychology, Economics), and if they fail all else, students graduate with
degree in Education or Art History. But what is the lifetime effect of
college major on lifetime income?
government article notes that Engineers earn the most while Educations
majors earn the least:
"Those working full time in engineering earned the highest average
monthly pay ($4,680), while those with education degrees earned the lowest
($2,802) in 1996."
MSN study notes that those who complete professional degrees can expect to earn
more than a million dollars over those without a college degree.
- Education and Social Science lag behind in earnings - Those with
Education degrees earn $200 thousand dollars less than the average for
bachelors degree. Social science majors earn $98k less than average,
and nearly $400 less than computer scientists and engineers.
|Lifetime gains are huge
A Masters degree dramatically
increases lifetime earnings,
with MS in Engineering and MBA
degrees having the highest
|A mixed result
The big payoff are for professional degrees.
In sum, the amount of education is highly correlated with higher lifetime
income, but the choice of degree type and college major also has a profound
difference in lifetime income.
Comparing Apples to Apples with Net Present Value
Obviously, the above lifetime earnings figures are enticing, and we are in awe
that going from high school to becoming an attorney is worth 3.2 million dollars
in increased lifetime earnings. When kiddies see the lifetime value of a a
college degree expressed in millions of dollars they say "Let's do it", but the
"real value today" of a payout over 40 years is much, much lower. Let's
take a closer look at computing the net present value (NPV) to see the "real"
costs and benefits of college.
In order to judge the "real" values of a college degree we must compare cost vs.
benefits, at the same time, at the same date. These are "lifetime"
earnings, an amount spread-out over 40 years. Plus, we have to consider
the "time value" of money, and discount a future payout according to the
opportunity cost of alternative investments. We will need to find
the algorithm for computing the net present value, factoring-in discounted
cash flows to get the net present value for both, today's cost of college vs.
today's net value of the lifetime earnings.
Hey, let's just use a
web-based annuity calculator for NVP and FV.
Our apples-to-apples time point will be at graduation time, after we have spent
the money for college and we are looking at the lifetime earnings. Here
are the equations and variables:
Future value of college costs
Here we add to get today's value of all the money you spent on college over
the years. For the costs, we must consider the "future" value of our
investment, at the "opportunity cost". This includes tuition, housing,
cell phone and books. The formula for the future value of money is
The net present value is expressed with this equation:
|PVD = Present Value of a
FVD = Future Value of a Dollar
i = interest rate per time period
n = number of time periods
Let's start with the NPV for the leap from High School to Bachelors degree.
Total costs for a typical 4 year degree at a cheap state university might cost
about $2k per month. Here are rough per-month cost of college:
- Tuition is 8 semesters at $4k each, $8k/year
- 48 months rent at $400/mo
- 8 semesters of books at $600 each is $1.2k/year =
- Food, cell phone, beer at $500/mo
- Airplane tickets to/from school is $1.2k/year
Over the 48 months of a 4-year Bachelors degree we have a total of $99,168.
For simplicity, let's just call it $100k even.
Using the equation with a opportunity cost of 1% per month, today's
(Graduation Day) net present value of this Bachelors degree costs
Now, the BA or BS graduate can expect to earn $900k more cash over their 40
years of work. This is only $1,875 extra per month. Let's see what
this expected $900k in future earnings is worth on graduation day.
Net present value of increased earnings
For lifetime earnings, we must consider the present value of a $900k annuity
($1,875 per month), spread out over 480 months at an opportunity cost of 1% per
||FV = Future Value of a Dollar
P = Principal
i = interest rate per year
n = number of years
Let's use a
net present value calculator.
On a yearly basis, we have 40 yearly payments of $22,500 at, say 10% interest.
We would have to invest $383k today to get
an annuity totaling $900k in monthly
payments of $1,875 each month for the next 480 months.
Hence, the "real" average value of a Bachelors degree is
- NPV cost of college
- NPV increased earnings $383k
So, is a 4-year college degree worth the investment? Ceteris Parabus,
yes. It's worth about $257k, or about a quarter-million dollars.
(subtract about $60k if you want to factor-in the lost wages from the student
working 4 years at $20k/year with 10% interest).
On average, getting a bachelors degree is just like paying $126k for the
right to claim extra earnings with an NPV of $383.