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Salary Breakeven for Private vs. Public College Graduates
Posted By Jim On 02/23/2009 @ 12:21 pm In Education | 21 Comments
I had lunch today with a few friends and the topic of private versus public college came up, a topic they recommended I put on my blog (so to appease them, I did!). As the graduates of private colleges, we were all curious what the difference in salary between graduating from a private college, paying $30,000+ a year for tuition/room/board/etc, and graduating from a public college, paying $10,000 a year for room, board, etc. The impetus of the conversation was that one friend knew someone who was graduating as a radiation oncologist and did a similar analysis between doctors and typical engineers (his analysis said it took twenty years for the doctor, a radiation oncologist, to “catch up” to an engineer, after accounting for typical raises, college loan debt, and other factors). So what’s the break-even point between private and public college graduates?
The answer …?
Not enough available data. (sorry)
The reality is that there are far too many private colleges and universities in too many fields, it’s impossible to say “the average starting salary of a private college or university graduate is…$X,” so no one does. Since we don’t have public data to work with (I have no idea where my friend’s friend got his numbers), let’s play with the numbers we do have, or can make up, and see what happens. Assuming all other factors are equal, the question comes down to servicing the loan. The privately educated graduate’s salary has to be greater than the publicly educated graduate’s salary by the amount of the loan payments.
If the privately educated graduate has to service a $75,000 student loan at 5.00%, then his minimum monthly payments are $402.50 a month assuming a 30 year payback period (standard payback period after you consolidate your loan). That works out to be $4830 a year. If you assume the student is in the 25% tax bracket, his salary has to exceed the publicly educated graduate by $6440 a year. If the graduated has $100,000 in loans, he or she would need a pre-tax salary difference of $8592 a year. If the debt were only $50,000, then the pre-tax salary difference falls to $4296 a year.
I am greatly simplifying this problem, in reality the difference is going to be less than $6,440 because the graduate with a higher salary is going to see their salary grow faster assuming the same percentage raises. If public student gets paid $40,000, then five years of 4% raises puts him at 48,666 a year. If private student gets paid $46,440, five years of 4% raises puts him at $56,501. The original $6440 difference has grown to a difference of $7835, or almost $1,400! However, given that this isn’t a mathematical proof and absolute correctness doesn’t really add much, I opted to skip that analysis.
According to FinAid.org , a graduate of a 4-year private non-profit institution has about $21,957 in debt versus a 4-year public student graduating with $17,277; a difference that is much less than the $75,000 and $0 I assumed above. Assuming a debt burden difference of $4680, the salary difference is only $402.08 a year (pre-tax). Four hundred bucks a year is not a big difference.
At the end of the day, whether your school is public or private has no impact on your salary. It’s far more important to take the set of possible majors your interested in and compare it with the best paying jobs  to determine what you want to study, then work from there to figure out where you want to go to achieve that.
College is still important though, according to the Census Bureau , bachelor’s degree holders earn an average of $2.1 million lifetime while high school graduates earn on average about $1.2 million lifetime. So stay in school, you’ll end up a millionaire!
Before you go, here’s a eye popping stat – The average amount of debt held by someone graduating with a degree in Medicine is a staggering $113,661 ($125,819 when you add in their undergraduate debt), no wonder it takes twenty years to break even!
(Photo: hmocopymonkey )
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 FinAid.org: http://www.finaid.org/loans/
 best paying jobs: http://www.bargaineering.com/articles/2008-best-paying-jobs-for-graduates.html
 Census Bureau: http://www.census.gov/prod/2002pubs/p23-210.pdf
 hmocopymonkey: http://www.flickr.com/photos/hmocopymonkey/2653462361/sizes/m/
Thank you for reading!