College Costs and Compound Interest

In this article we’ll be taking a look at college costs and compound interest in considering careers. Of course, there’s more to your career than money, but ignoring the financial aspect of colleges and careers can have painful consequences. A stable financial situation can also give you more flexibility to pursue your passions. Let’s make this practical by taking a look at two potential career paths.

Comparing Two Career Paths

Peter the Plumber starts working straight out of high school as an apprentice plumber. We’ve taken his salary (rounded) from this Reddit post. Over the next twelve years, Peter will earn:

• Age 18: $32,000
• Age 19: $40,000
• Age 20: $47,000
• Age 21: $55,000
• Age 22: $67,000
• Age 23: $80,000
• Age 24: $80,000
• Age 25: $80,000
• Age 26: $80,000
• Age 27: $80,000
• Age 28: $80,000
• Age 29: $80,000

At age 30, Peter will have earned $801,000, but he may have trouble earning a higher salary than $80,000 in the future.

Now let’s take a look at Lawrence the Lawyer. Lawrence goes off to a state college, graduating with $27,700 in debt (the average for Bachelor’s degree holders from state universities). He graduates from law school three years later, carrying the average debt of a law school grad: $145,500. He starts working at age 25, luckily finding work in big law with its impressive salaries. His income by year is:

• Age 25: $213,000
• Age 26: $235,000
• Age 27: $290,000
• Age 28: $348,000
• Age 29: $392,000

At age 30, Lawrence has earned $1,478,000, for a net of $1,333,000 after paying off his school loans.

Net Income After FICA and Federal Taxes

Now let’s apply FICA and income taxes (assuming no state or local income tax) to those twelve years. Peter pays $158,000 in taxes, while Lawrence pays over $438,000 (calculated using this tool). That brings their net income to $643,000 for Peter and $895,000 (income – taxes – college debt) for Lawrence—much closer numbers than before.

Investments and Compound Interest

Now let’s take a look at how college costs and compound interest work out in our two cases. First, we’ll look at how much Peter would have in his investment accounts, based on a savings rate of 15% and a 5% return compounded annually. Peter starts earning and saving early and ends up with $123,207 in investments by age 30. He only contributed $96,435, but over the years his contributions earned $26,772.

If Peter managed to save and invest 30% each year at 5% interest, he could have doubled that interest income to $53,544, with a total of $246,413.38 in investments.

Meanwhile, Lawrence would actually have the power of interest and compound interest working against him with his school loans, and also have less time for his investments to compound before age 30.

Practical Takeaways of College Costs and Compound Interest

As we compare these career paths, the big law lawyer is clearly on a trajectory to earn and save more money than the plumber. Still, there isn’t a clear best path, and we can make some interesting observations.

Financial Risk and Career Flexibility

Peter the Plumber’s path is a lot less risky. He’s actually earning money each year, though not a lot initially. He manages not to take on any debt, giving him more flexibility if he ever decides to try a different job or start his own plumbing business.

Lawrence ends up with a much better salary in our simulation, but that’s not always the case. Plenty of J.D. graduates fail to pass the bar, and even fewer land big law jobs. The top fourteen law schools generally place between 50-70% of their graduates in big law, Outside of the top 35 law schools, no school manages a big law placement over 20%.

What does this mean practically for Lawrence? It likely means he worked really hard to get into a top law school, worked really hard to graduate in the top half of his class (or higher), and worked hard to pass the bar and interview.

After landing the job, Lawrence likely worked 60-70 hours a week to hit his bonuses and stay on track for partnership. His compensation was much higher than Peter the Plumber’s at this point, but he was also working 50-75% more hours.

Lawrence also took on significantly more financial risk than Peter. If Lawrence changed his mind halfway through law school or burned out in his second year in big law, he would suddenly find himself with a very poor financial outlook due to his high debt. His example shows that students should consider the financial risk and career flexibility in addition to the gaudy salary numbers.

Pressure and Meaning

Two more factors to consider are job pressure and meaning. Lucrative fields such as big law, medicine, and international banking often come with heavy demands and high pressure. If you prefer a more laid-back work environment, this should be a consideration in your career choice.

On the other hand is the question of meaning. If you want to spend your life performing life-saving surgeries or having the prestige of a lawyer, then the only way to achieve that goal is to work hard and take on the financial risks and rewards of medical / law school.

A Variety of Paths

There are, of course, more career options than law and the trades. Bachelor’s degrees can launch your career in many high-demand fields, while requiring less debt and time than paths like law and medicine. Majors such as computer science, nursing, finance, accounting, and engineering all remain stable paths to well-paying jobs.

In the end, you can do well financially without a college degree, with a doctorate, or anywhere in between, but here are two takeaways as you consider careers and financial stability:

• Before taking out a significant amount of college debt, take a close look at the career, expected salary, and whether you’re willing to commit to this career (especially for graduate school).
• Look for ways to spend less and save and invest more. Even a slight percentage difference in savings can have a big effect over time through the power of compound interest.
• Consider multiple aspects of the careers you’re considering, including the cost of education (money and time), expected salary, and other less tangible factors like stress level, work-life balance, personal fulfillment, and how it fits with your unique aptitudes.

We hope this discussion on college costs and compound interest has been thought-provoking and helpful. By running the numbers on your potential careers, you can avoid pitfalls and find a path to financial stability in a career that fits you!

For further reading, you can check out our articles on college loans and debt and how to choose a fulfilling major and career.