The Real Life ROI of Student Loans

I was going through my documents today, and came across an article I created a couple years ago which reminded me how far I had come from before in terms of managing personal finances.. As of a few months ago, I fully paid off my student loan and am debt free… but here’s a good insight behind that!

Over the past several years, there have a number of studies on the benefits of a post secondary education and how they can increase your lifetime earning potential. While the studies are interesting to read, I thought I’d dive into my own life and look at the difference a degree has made for me in just a couple years, compared to my friends who went straight onto work.

For me, it’s been almost ten years since I graduated high school, and in that time I’ve managed to spend upwards of $30,000 for a Commerce degree. Even today, it’s hard to imagine that in just four-years, while living at home, I could burn through $30k — but, I figured it was an investment that would pay off quickly… and it did. Before even walking across the stage to pick up my degree, I had already landed a solid job that would become the basis of my career. Not only that, most of my graduating class were in the exact same situation! The only downside though, was this piece of paper came with a pretty hefty price tag attached to it that would follow me around for years to come.

In my case, the $30,000 student loan I took out, would (according to my bank) take about eight years to pay back, along with $10,000 in interest, at 3.5% per year, making my payment roughly $4,500 a year. Even with a good paying job, it’s was noticeable chunk of money out of each paycheck – money that could have been spent on something else… like beer! But, just like the countless hours I put into going to school, this money was as an investment.

Doing the math, this investment is already paying off – right now, I’m earning an instant 222% return on it. How do I figure? Well, I compared my income to that of friends who didn’t go to school, and looked at the difference in pay.

For my friends who went straight on to working after high school, they hold the advantage of actual work experience along with no student loan. But, when you look at the type of jobs they have, most of them being retail and restaurants, you realize that their earning potentials are quite different. Averaging out their salary, they make roughly $15,000/year less than what I do. From the other viewpoint, I was making $15,000 morethan them, in spite of the fact I had limited work experience. So even after paying the $4,500/year for my student loan each year, I was still making almost $10,000 more, simply by graduating university – a 222% return.

Now, in all fairness, this calculation discounts the fact that my friends also had a four-year head start in terms of earning income. Even calculating that in, with my degree earning me about 1/3rd more than what they make, it would only take three years to catch up. And at that point, the additional earning potential is realized. But, I consider these four years a sunk-cost in my life, so I took them out of the calculation all together.

By simply showing up every day and applying myself, I had opened the door to a number of career prospects, while also growing a network of industry contacts. Sure, the four-years were challenging, filled with never ending homework, and stressful exams, but they were all part of the investment. Not only that, this return on investment only gets bigger over time – when you factor in my salary growth over the next 40 years, compared to those who didn’t get a university degree, the percentage will typically be much higher, thus widening the gap even further.

But that’s the long term – in the short term, I’ll sit back and pay my student loan each and every month, knowing that I’m enjoying my 222% return on investment.