Paying for College: Consumption and Investment Spending

This post is a bit of a think piece, but it may give some perspective on educational costs.

To start with, in measures of household spending and savings, education is categorized as consumption. The US is on the low end of household savings internationally. We’re also on the high end of college costs relative to median household income. Certainly, there’s some tradeoff between taxes and savings rates, and between taxes and college costs. Higher taxes make it difficult to save, and higher taxes are associated with lower tuition costs. And yet, France has high taxes, a 12.7% savings rate, and a year of college costs, on average. $585.

In the US, households may save money for a child’s college education, and then they work that savings level down to pay for it – a negative savings rate. Then, the student may take on debt, and have to pay off the student loans, which makes it difficult to save more money until the debt is gone.

And yet, college isn’t a consumption expenditure the way that a new purse or a restaurant dinner or a vacation are. It is an investment in future earnings capacity, so that’s good. It should be thought of as investment and savings, not as frivolous spending.

Keep in mind, though, that the benefits of college are greatest for people who graduate and who enter marketable fields. No investment is a sure thing, and that goes for education. Be smart about it.

But also know that maybe Americans aren’t quite the slackers that the data sometimes make us out to be.

 

 

A white woman with green glasses and gray hairAnn C. Logue

I teach and write about finance. I’m the author of four books in Wiley’s …For Dummies series, a fintech content expert, and an avid traveler. Among other things.

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