In a recent opinion column http://tinyurl.com/2az9y4b published by
Forbes, Jerry Bowyer decries the value of a college education in the United
States. He calls it a “higher education bubble”. Bowyer contends that “higher
education shows every reasonable sign of having a completely unrealistic,
astronomical price tag” and that those that argue the benefits of higher
education are irrational.
The return on investment of a college degree varies by school, subject of study, gender, race, geographic location and other factors, and the value of a college degree is an ongoing debate. Unfortunately, Bowyer’s submission provides absolutely no valuable contribution to the debate.
First, rather than performing a cost/benefit analysis (i.e. computing the cost and comparing it to the expected benefits), Bowyer calculates a Price/Earnings ratio. The P/E ratio is one of many analytical tools used to evaluate securities whereby the price of the stock is compared to the corporation’s most recent earnings. It’s a simple calculation that can be used to compare stocks of many corporations. Up until now, no one has been stupid enough to think that P/E ratios are useful comparing the relative value of stock to a college education.
Second, Bowyer blatantly overestimates the “P”. In estimating the cost of college, Bowyer makes convenient assumptions that overstate the cost. A typical bachelor’s degree program is designed for four years of study. Bowyers claims that on average students take six years to complete a four year program. He claims he got this from a book entitled “The Five-Year Party”. He says this is because students increasingly drop classes late in the term to avoid failing grades.
And in calculating the “E” part of the equation, Bowyers is equally unfair. For the “E”, Bowyer uses the increase in earnings only for the first year out of college. He calculated that the increase in earnings due to a college degree is only $2,000 for the first year and that the P/E Ratio is 100. Coca-Cola stock P/E is around 20. Microsoft is less than that. Bowyer’s conclusion: An investment in a college degree “doesn’t look very attractive”.
Because one statistic is not sufficient to analyze an investment in a security, investors use dozens of statistics and trends in statistics and audited financial data. Bowyer uses manipulated inputs to one convenient statistic to draw his conclusion that it “doesn’t look very attractive”.
But a P/E Ratio is a stupid way to evaluate a long-term investment. When a business decides to invest in equipment, they don’t compare the cost to what the income would be for the first year. They compare the cost to the present value of the expected income stream and calculate the return on investment. For a college degree, that’s already been done.
Not only has it been done, but PayScale estimated the return on investment for hundreds of institutions http://tinyurl.com/29r7ah4 Using the same inputs used by Bowyer (only they used actual inputs, i.e. actual cost, actual earnings of graduates), they estimated returns on
investment for four-year college degrees. The returns vary from as high as 12.6% (How’s that, Jerry?) to 4.3%. But not all college degrees are alike. Not only do the returns vary by school, but they also vary by field of study. Someone who studies accounting will get a higher return on their investment than someone who studies 18th century French poetry. And the inputs are not just financial. Someone who works hard will realize a better return than someone who parties and drops classes.
Figures can be manipulated. A clever hack can manipulate one statistic to support a pre-drawn conclusion. Jerry Bowyer seems to be in the habit of doing it.
The return on investment of a college degree varies by school, subject of study, gender, race, geographic location and other factors, and the value of a college degree is an ongoing debate. Unfortunately, Bowyer’s submission provides absolutely no valuable contribution to the debate.
First, rather than performing a cost/benefit analysis (i.e. computing the cost and comparing it to the expected benefits), Bowyer calculates a Price/Earnings ratio. The P/E ratio is one of many analytical tools used to evaluate securities whereby the price of the stock is compared to the corporation’s most recent earnings. It’s a simple calculation that can be used to compare stocks of many corporations. Up until now, no one has been stupid enough to think that P/E ratios are useful comparing the relative value of stock to a college education.
Second, Bowyer blatantly overestimates the “P”. In estimating the cost of college, Bowyer makes convenient assumptions that overstate the cost. A typical bachelor’s degree program is designed for four years of study. Bowyers claims that on average students take six years to complete a four year program. He claims he got this from a book entitled “The Five-Year Party”. He says this is because students increasingly drop classes late in the term to avoid failing grades.
And in calculating the “E” part of the equation, Bowyers is equally unfair. For the “E”, Bowyer uses the increase in earnings only for the first year out of college. He calculated that the increase in earnings due to a college degree is only $2,000 for the first year and that the P/E Ratio is 100. Coca-Cola stock P/E is around 20. Microsoft is less than that. Bowyer’s conclusion: An investment in a college degree “doesn’t look very attractive”.
Because one statistic is not sufficient to analyze an investment in a security, investors use dozens of statistics and trends in statistics and audited financial data. Bowyer uses manipulated inputs to one convenient statistic to draw his conclusion that it “doesn’t look very attractive”.
But a P/E Ratio is a stupid way to evaluate a long-term investment. When a business decides to invest in equipment, they don’t compare the cost to what the income would be for the first year. They compare the cost to the present value of the expected income stream and calculate the return on investment. For a college degree, that’s already been done.
Not only has it been done, but PayScale estimated the return on investment for hundreds of institutions http://tinyurl.com/29r7ah4 Using the same inputs used by Bowyer (only they used actual inputs, i.e. actual cost, actual earnings of graduates), they estimated returns on
investment for four-year college degrees. The returns vary from as high as 12.6% (How’s that, Jerry?) to 4.3%. But not all college degrees are alike. Not only do the returns vary by school, but they also vary by field of study. Someone who studies accounting will get a higher return on their investment than someone who studies 18th century French poetry. And the inputs are not just financial. Someone who works hard will realize a better return than someone who parties and drops classes.
Figures can be manipulated. A clever hack can manipulate one statistic to support a pre-drawn conclusion. Jerry Bowyer seems to be in the habit of doing it.
