COLLEGE EDUCATION – AN INVESTMENT WITH ALARMINGLY DIMINISHING RETURNS

Hundreds of thousands of Indian kids are being  put through college education by their parents by incurring costs ranging anywhere between Rs. 5,00,000/- (Rupees Five Lakhs) to Rs. 1,00,00,000/- (Rupees One Crore). Whereas in comparison very modest sums were spent on the college education of the parents of these kids, the parents have earned a return on investment on their education cost that will be far better than what their highly qualified wards can ever aspire to earn.  Thus, today’s children are being set up to be fiscal failures of sorts - in the sense that they will severely under-perform as compared to their parents in the matter of return on college education investment.

This is my proposition which I will proceed to systematically substantiate.

Parents born between 1955 and 1965 are the sample we will consider.  They are today between 50 and 65 years of age.  They have been in the work force for 30 years or more.  Their children are undergoing college education.  These are fairly reasonable assumptions for urban Indian demographics.

We add the following assumption.  Rs. 30000/- were spent on college tuition, other college expenses, lodging and boarding of the parents when they were put through college in the period between 1973 and 1987.  Rs. 30000/- is a fair average value for that period.  Given this data, I constructed the following table.

If this is the corpus (Rs.) built by a parent born between 1955-1965 after 30 years of work (excluding inheritance)…	…then this is the annual compounded return that has been obtained over a 30 year period, on the college spend
1 crore	21%
2 crore	24%
3 crore	26%
4 crore	27%
5 crore	28%
8 crore	30%
10 crore	31%
12.5 crore	32%
15.5 crore	33%
20 crore	34%

 A very basic compound interest formula was used to calculate the above values:

Corpus = 30000 x (1 + n)^30, n = 0.21, 0.24, 0.26 etc.

To put it in the form of a statement – “If one completed college education between 1973 and 1987 and after 30 years of work one had a corpus of Rs. 3 crores, excluding what one inherited from parents, then one earned a compounded yearly return of 26% on the Rs. 30000/- that were spent to put one through college”.

Now I calculate the average of the various percentages in the above table – it comes to 27.5%.  Thus on an average, the parents clocked a 27.5% return on cost of college.  This is the target I will set for the children’s generation.  That is, the children should match the average performance of their parents.  Actually, considering that today’s kids get far more attention, and will live in times far more competitive and “business oriented” than their parents, we should really be setting them a stiffer target.  But let that be.  Let us set them a target of 27.5%.

This time around we start with a statement and then we will expand it into a table.

“If your parents spend Rs. 15 lakhs on your college education, then to match your parents’ “return on college education cost” performance, after 30 years of work you must have an accumulated corpus of Rs. 220 crores apart from what you inherited from your parents.”

If this is the amount  (Rs.) being spent by  parents on college education…	…then to obtain a 27.5% annual return, this is the corpus (inheritance not included) that the child must accummulate  over a 30 year period
5 lakh	73 crore
10 lakh	146 crore
15 lakh	220 crore
20 lakh	300 crore
40 lakh	585 crore
60 lakh	880 crore
70 lakh	1000 crore
80 lakh	1200 crore
90 lakh	1300 crore
1 crore	1500 crore

The same formula as before, worked in reverse, was used here.

Without going into any further calculations, my prediction is as follows.  Today’s kids will, on an average, earn a 15% annual compounded return on college education cost, as compared to 27.5% earned by the kid’s parents.  Just glance through the required corpus amounts in the above table.  They are simply not achievable.  What a melancholy commentary this is on the state of affairs with regards to education and wages.  I am a parent from the aforementioned parents’ generation.  We believe (and rightly so) that our kids are smarter, they will work in a smarter world, they go to better colleges than us, they will be better qualified than us and the world today is an amazingly interconnected place where your competence is all that matters.  Yet, they will do very poorly as compared to us when it comes to fiscal return on college education costs.

“Education has become a business” – this is the most common refrain or complaint or lament that one hears from parents in India who are in the process of putting their kids through college.  It seems to me that education has indeed become a business … one in which the takings of those dispensing education are rising while the earnings of those receiving education are falling dramatically.

Thus, present day parents seem to have the following choices when deciding how much to spend on  their kids’ college education

(1)Think of the cost as an investment, project the reasonably likely returns on it and base decisions on this analysis.

(2)Think of the cost as an indulgence.

(3)Don’t think, just spend.  Give the kids the "very best" (?!).