Friday, December 18, 2009

Bad Bet, or Bad Beat? Higher Education by the Numbers

As long as I'm touting "the gambler's way," which is basically applying gambling/probability in order to make decisions about the world, I should apply it to education. Being of the worker bee class, I can remember when my friends and I would balk at our fees and all of the other associated costs of higher education in America.

Then there was grad school stories. I distinctly remember when Devon called me one summer from Harvard Law; my jaw dropped when he told me what the numbers were. Luckily, Dev's a smart cookie, and doing quite well. But talk about dodging bullets.

And that was then.

Like everything else, college costs have exploded, and the amount of debt a person incurs now before even becoming gainfully employed is a "mini-bubble" that I've always felt unsustainable. As with all bubbles, the chickens eventually come home to pop them, to mix aphoristic metaphors.

To "do the math," as gamblers would say, we're lucky to have James Altucher, who's a pretty accomplished hedge fund wiz. After his recent article - which I was tipped off to by Howard Stern - there's an earlier blog post from February '08 by Altucher which, though not as analytical from the numbers perspective, is much more aggressive as a rhetorical argument.

I'd like to hear his take on entrepreneurship, which he advocates instead. The first article treats that a bit blithely, and you can trip and fall big time in that arena as the vast majority of businesses fail in year one, and the vast majority that get to year two also fail then. So, I agree with his prescription, I'd just like to see what he thinks should be a support system for entrepreneurs. But that's a minor thing in relation to the theme; both are good articles, and I couldn't agree more.

The NY Post, at:


Biz degree is bad investment

Last Updated: 3:58 AM, November 1, 2009
Posted: 12:59 AM, November 1, 2009

Somehow I went wrong as a father -- the other day my two daughters informed me they eventually want to go to college.

I said, "No way!" and they attempted to argue with me. I have no problem with them talking back to me but somehow they've been brainwashed by society into thinking that college is a good thing for intelligent, ambitious young people to do.

Let's look at the basic facts about higher education.

The average tuition cost is approximately $26,000 per year -- including $10,000 in living costs, books, etc. -- or roughly $104,000 for a four-year program.

Some people choose to go to more expensive private colleges and some people choose to go to cheaper public schools, but this is an average. Also, a huge assumption is that it's just for four years.

According to the Department of Education, only 54 percent of undergraduates get their diploma within six years. So for the 46 percent that don't graduate -- or take 10 years to graduate -- this is a horrible investment. But let's assume your children are in the brilliant first half who finish within six years -- and hopefully within four.

Is it worth it?

First, let's look at it from a purely monetary perspective. Over the course of an individual's lifetime, according to the College Board, a college graduate can be expected to earn $800,000 more than his counterpart that didn't go to college -- $800,000 is a big spread, and could potentially separate the haves from the have-nots.

But who has and who doesn't?

If I took that $104,000 and invested it in a savings account that had an annual interest income of 5 percent I'd end up with an extra $1.4 million over a 50-year period -- $600,000 more then a sheepskin-toting peer.
[emphasis mine]

That $600,000 is a lot of extra money an 18-year-old could look forward to in her retirement. I also think the $800,000 quoted above is too high. Right now most motivated kids who have the interest and resources to go to college think it's the only way to go if they want a good job. If those same kids decided to not go to college my guess is they would quickly close the gap on that $800,000 spread.

There are other factors as well. I won't be spending $104,000 per child when my children, ages 10 and 7, decide to go to college. College costs have historically gone up much faster than inflation. [emphasis mine] Since 1978, the cost of living has gone up three-fold. Medical costs, much to the horror of everyone in Congress, have gone up six-fold. And college education has gone up a whopping tenfold. This is beyond the housing bubble, the stock market bubble, any bubble you can think of. [emphasis mine]

So how can people afford college? Well, how has the US consumer afforded anything? They borrow, of course. The average student now graduates with a $23,000 debt burden, up from $13,000 12 years ago. Last year, student borrowing totaled $75 billion, up 25 percent from the year before. [emphasis mine]

If students go on to graduate degrees such as law degrees they can see their debt burden soar to $200,000 or more. And the easy borrowing convinces colleges that they can raise prices even more. So what should people do instead?

One idea: start a business. You don't need to be an entrepreneur to get valuable experience selling a service, or buying some set of goods cheap and selling them expensive. A year or two of that will be a substantial education in salesmanship, finance, and how to deal with the ups and downs of any business.


Financial Times, at:

College a waste of time and money for kids

By James Altucher
Published: February 12 2008 02:00 | Last updated: February 12 2008 02:00

Last week I made an off-the-cuff comment in my column that stirred up several e-mails asking if I was serious. What I said was that I had no intention of sending my kids to college. I was dead serious. I find the thought of college abhorrent, particularly for 18- to 20-year-olds. Kids have a lot of energy at that point, and to deaden it with a forced, unsupervised diversity of random topics taught by mostly mediocre professors is a waste of that energy.

I can't remember anything good coming from my freshman year - other than starting a business with a few of my classmates, which inspired me for subsequent businesses.

We set up a company called "CollegeCard", which offered debit cards to college students. This was 1987, before credit cards were common for college kids. Parents would send us money, which we'd deposit in the student's account with us, and the students could then use their cards up to that amount. My role was to convince every business in town not only to accept our card but also to offer discounts to its users. At night I ran the delivery business, which delivered from every restaurant that accepted our card. I was notoriously incapable of generating any tips, though one of my partners, Wende Biggs (daughter of Barton) always got great tips. (I had an unrequited crush on her.) Thankfully, she'll never read this because she now lives on a farm in France.

Here is what's wrong with college.

First, and foremost, it's too expensive. To send a kid to college you need from $200,000 to $400,000. That's insane. There's no way the incremental advantage they get from having a diploma will ever pay back that amount. Perhaps for the first time the opportunity cost (a phrase I remember from Economics 101) of college does not equal the extra profits generated by the degree.

Second, I don't believe in a balanced education. Most colleges require students to take a smattering of art, maths, sciences and so forth. Taking 10 courses a year on wildly different topics, with enormous homework responsibilities, not to mention droning, boring professors for at least eight of the 10, is the surest formula for creating complete non-interest and inability to remember anything in any of the topics covered. What a waste of $400,000.

And third, there are far better uses of time. One reader asked what her kid should be doing instead of college. Here are some of my responses:

1. Working - not just a labour or service job, but there are internet-content jobs out there. I have high school and college kids working for me who are making over $50,000 a year from writing gigs on the internet. Scour Craigslist for opportunities, your favourite blogs, or websites related to your favourite interests. Companies are dying for good content. Create your own blog, get yourself noticed, build relationships with other content companies and communities.

2. Take half the fee for one semester, give it to your kid, and tell him or her to start a business. Not every youngster has entrepreneurial sensibilities, but it's always worth trying once. The cost for starting a business is next to zero, so it's a viable alternative. What business should they start? For one thing, now that Facebook and MySpace have open development platforms, try out a few applications for these platforms; for a few hundred dollars you can outsource development of these applications to India, and get your friends to start trying them. Make sure they are viral (that is, a message should appear "click here to get all your friends to try XYZ") and see which ones are a success. I mention Facebook and MySpace because every kid is familiar with these sites and comfortable with the subtleties, and it's this comfort that can create the best businesses.

3. Spend a year trying to become good at one thing. Whatever your child's greatest interest is, whether cooking, chess, writing, maths, there are so many resources on the internet available for learning that college is almost the last place a kid should go to pursue a passion. Intense immersion in a favourite topic is the surest way to become an expert in that field.

And what about travel? Well, I'm not a big believer in that unless it's completely supervised. There's plenty of time to travel later in life. But right at home there's a plethora of opportunities that can far exceed the value of a college education at a 10th of the cost, and lead to greater experience and opportunities in career, wisdom, and life development.