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The College Decision: Proceed at your own risk

Updated: May 9, 2022

High school kids need to be careful making the high stakes, high risk, high return College Decision

Today, the student lending crisis continues to grow. Bloomberg News recently stated:

"The student debt crisis is one that spans generations, with about 8.7 million Americans aged over 50 still paying off college loans."

Ground zero for the crisis is the point at which the high school student first makes the college choice. This article examines key challenges that make the choice so hard.

First, let's dig into the traditional, long-standing American narrative: College Pays.

With the related narrative being: College is a good investment.

But is it really? It turns out this is likely only true for a minority of Americans that start college. I call this the "Blue Pill Narrative." (1)

But first, who supports the College Pays narrative? What data are they using? The narrative support is provided by the U.S. Government. The data is presented by the Bureau of Labor Statistics (BLS) as in the following graphic:

This looks pretty compelling! Right? As one increases educational attainment, it shows a steady increase in average salaries and a steadily declining unemployment risk to those salaries. If I was a high school junior, I would zero in on the "Bachelor's Degree" line and get excited! Maybe the high school student would think "I do not know exactly what $1,305 a month means, but it definitely sounds like a lot of money!"

Now, let's turn to the "Red Pill." There are 2 challenges with this graphic. The graphic shows an incomplete and rosy risk-free return on college. It may lead high school kids to make a less than accurate college assessment.

Let's dig into this sentence.

Incomplete: Notice the college return is presented in earnings or gross income. This is incomplete because we do not live on gross income! We actually live on net income, which is called "disposable income." That is, this graphic does not take into account our living expenses. Especially since one of the largest expenses for many 20 or 30-somethings is the monthly college loan payment! So why would a graphic show a college return measure that does not account for the largest direct college cost? Bloomberg News indicates we are in a College Debt crisis but the standard narrative does not account for the crisis. Hmmm.

Rosy risk-free return on college: This challenge has to do with the analysis approach and data presentation method. This is nuanced but very significant. The BLS graphic is presented as a snapshot in time. Also known as a descriptive portfolio analysis approach. As the name suggests, this approach is good for describing our current world, but, it is not as useful for making future impacting decisions.

Here is the problem. If you are a high school student, you likely got excited about making $1,305 a month. But this is only for people that actually finished their undergraduate degree. There is a significant risk of not getting to this stage. In effect, the BLS graphic shows the rosy, best-case scenario for those that graduate. But just like no one buys mutual funds without understanding both risk and return, no one should make the high stakes, high risk, high return college decision without college risk understanding. Hmmm, again.

At this point, you may be thinking, "Ok, then what is the right way to think about college risk?!"

Great question! First, instead of using a descriptive portfolio analysis approach for decision-making -- a cohort (aka, vintage) approach is more appropriate. This approach aggregates the cohort at the time the college decisions are made and then measures the aggregated future outcomes of the decisions. In the college decision example, the proper analysis would aggregate past high school grads that are incoming college freshmen. Then, measure outcome information 6-10 years into the future. Unfortunately, this data is very hard to obtain.

Good news! I assembled a couple of sources, utilizing data from a December 2018 Wall Street Journal article and Pew Research to provide a cohort-based performance view. (2) The next graphic shows the results. It is a dramatically different picture than the BLS graphic.

To orient you to the graphic, this is based on a group of incoming freshmen and their outcomes 6-10 years later. The primary pie slices, what I call life impairments, are based upon:

  1. Having a loan

  2. Defaulting on your loan

  3. Not finishing college

  4. Not getting a job that requires a college education

The pie chart shows risk as both the higher of:

  1. the number of impairments, and

  2. the severity of those impairments.

So, the higher the risk, the hotter the pie chart colors. For example, the "Great Start" slice is dark green, it has no impairments, which means 6-10 years after the freshmen entered college, they graduated, got a job that requires a college degree, and with no loan. Great news, but for only 9% of rising freshmen!

Now, going clockwise around the pie chart, the impairments only increase in frequency and severity. We can quibble over the severity of the impairments. (such as, is graduating from college and defaulting on a loan worse than not graduating from college and not defaulting on a loan?) To be fair, severity risks are individually and situationally anchored.

The point is the more the impairments, the more the risk. The more the risk, the less likely the college investment is to pay off.

To this point, from the graphic, there are heightened risks for about 70% of kids that start college that may eventually:

  • default on a loan,

  • not get a college-level job, or

  • will not graduate from college.

Finally, not long ago, economist Bryan Caplan wrote an excellent book called "The Case Against Education." It is a heavily researched education wake-up call. One of Dr. Caplan's most telling comments is:

"Here's the real crisis: every year, over a million students who won't graduate start college. Their failure is foreseeable; high school students with poor grades and low-test scores rarely earn B.A.s. Instead of tempting marginal students with cheap credit, we should bluntly warn them that college is stacked against them."

This is pretty scary stuff. Caveat Emptor....Buyer Beware!

Certainly, a more accurate narrative and better data analysis would help high school kids and their caregivers make better college decisions. Also, the college decision itself is incredibly complex. Way too complex for most people, especially high school students. To this end, I invite you to check-out our companion article. We discuss a helpful college decision framework in our article The College Decision - Framework and tools for investing in your future.


(1) "Blue Pill" and "Red Pill" is a reference from a scene in the 1999 movie The Matrix.

Morpheus explains to Neo that the Matrix is an illusory world created to prevent humans from discovering that they are slaves to an external influence. Holding out a capsule on each of his palms, he describes the choice facing Neo:

This is your last chance. After this, there is no turning back. You take the blue pill—the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill—you stay in Wonderland, and I show you how deep the rabbit hole goes. Remember: all I'm offering is the truth. Nothing more.

(2) This is based on data provided in the Wall Street Journal article “Calculating the Risk of College,” 12/10/18, and was supported by Pew Research. The author did estimate based on a small number of interpolations when the article data was not available. The author is comfortable with the interpolations as they are 1) bounded by and 2) at the center point of a fairly narrow band of known data. Also, the author developed the 4 segments observed in the graphic. The following graphic provides the segment data and definitions:


Further Reading:


High School Students

College Students

Career and Beyond


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