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College is an investment

Peter Thiel the “legendary” investor who brought us companies like PayPal has an interesting “thesis” on higher education; it’s in a bubble.

It’s true that college is losing relevancy in many fields and market sectors. And yes it is becoming more and more expensive to attend. Heck as someone who went to school to be a teacher (and never became one because of what I saw “in” the system), the whole education system in this country needs an overhaul. Fast.

However, education, college or otherwise, should always be thought of as an investment. An investment that includes time plus money (and interest in some cases), which needs ultimately to provide a return over time (an increased wage over what would be earned without the education). In the past college was a great investment because it gave a great return (like Microsoft when it was a growth stock).

Having a college degree all but ensured you would make X% more per year (and thus you could afford the loan repayment while still having more cash in your pocket (your return)).

As colleges have become more commercialized over the years, acting more like businesses and less like institutions of learning, learning has become a commodity –  in order for the colleges to continue to “grow”, have better facilities, sports teams, etc they must crank out more students.  The classroom is today’s assembly line cranking out last years widgets…I mean students. It’s all about the numbers.

The result is that a college degree in most fields and sectors is a commodity. Like all commodities, a college degree is no longer valued as highly by employers. Thus while it matters, it simply doesn’t warrant paying more for it every year. This is self perpetuated by the fact that there is also an increased supply…more students graduate every year.

Thus the return on investment on a college degree has decreased over time. This is further impacted by the fact that school’s don’t work like assembly lines – they don’t pass on the economies of scale realized by assembly lines as they produce more. They simply charge more because they can and well “dumb” investors continue to pay for it (because like any type of investing, some get it and some don’t).

Today, investing $250,000 in a college degree, especially in a profession that does not command top pay (I cringe when people go into communications, business, marketing, etc), may only take you from a $30K starting salary to $35K. That extra $5K over the course of loan repayment nets you a $100,000 loss on your investment. But if you spent $500,000 and became a surgeon, well you may start-off at $300K and over the life of the loan give yourself a handsome return.

So is there really a bubble in education? In some areas. But as a “legendary investor” its funny that Peter took such a broad stroke with his thesis and didn’t even speak to education as an investment – which it is. And like all investments there are good ones and bad ones.

Education, for most, just may no longer be the one that provides the greatest long term return. Did I just hear a “pop?”

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