Is getting a degree worth the financial cost?

Upon submitting a research on stock markets to a finance company and winning the first place in their Finance and Banking category of the award; the winner was offered a part time job in the company since he hasn’t graduated yet at the time. In brief, the job was to carry on stock market analysis and offer winning picks, short-term and long-term, for the CEO of the company to choose from when trading in the market. Without further due, the interview with the CEO was scheduled promptly, and it went well up to the point when the CEO asked about our winner’s 5 year plan. “I want to enhance my skills in finance and economics. I want to do my masters first, then find a research area of interest”. After 30 seconds of silence, the CEO asked: “do you realize that time and effort invested into getting a master degree gets you no more than AED 1,000 increment in your monthly salary?”

We can somehow agree that investment in one’s education is a worthwhile one. It never is about getting a humble salary raise. It’s in fact about having better recruitment opportunities for jobs with relatively better pay, or better prospects for promotions in existing work place. What you need to ask yourself before taking a step towards postgraduate studies is whether or not you could afford it. Do you have enough savings? Does the university offer a flexible payment plan where you could pay it monthly from your salary? Or can you get a scholarship from your workplace perhaps? (Surely not in the case of our CEO). Or as last resort, obtain a loan to fund your future career advancement? The remainder of the article will discuss the last option and its impacts. For argument’s sake, let’s first compare student loan to a loan that you spend consuming stuff, buying a car for instance, to highlight how different one from the other. When you obtain a loan to buy a car, you basically bring your future savings forward to enable you to consume today, only that you are paying interest over the tenure of the loan. The same applies to personal finance.

When spending on education, even if via loan, will supposedly guarantee the person a higher income in the future. According to the Organization for Economic Cooperation and Development, individuals receiving more education than their parents manage to attain higher incomes in the future. However, the argument is not flawless. First, a “research by US Federal Reserve Bank of New York finds that many borrowers still haven’t paid off their student loans by their 40s and 50s” (CNN Money). This is caused by a couple of reasons: first, not linking the student loan payment to the level of income the person makes, which might be low if the person settles for any job they can grab in the market. Second, not being able to collect student loan payments, especially from those who go to work abroad, cause gaps in governments’ budgets. Third, tuition costs are on a continuous rising trend which is one main reason why there are around 40 million Americans who carry at least one student loan.

Student loans are seldom spoken of in the UAE. In the matter of fact, banks and financial institutions have only lately introduced these as personal banking products. And for that to not lead to similar issues faced by the US, where student loans are at $1.2 trillion: 1. Proper scrutiny needs to be done to ensure that these loans will not result in unsettled loans up to retirement, 2. Being able to cope with payments which, if not ensured before lending the money, will lead to decreased saving and future defaults. When plotting US net saving data, Krusell from Stockholm University and Smith from Yale University find out that net savings “has fallen gradually to 0”. For the UAE, student loans are mostly directly towards post graduate studies, for which the central bank might want to consider a debt to salary ratio below the 50% threshold. Now the last thought that I want to leave you with is this: does anyone know how much is the monthly salary increment for getting a PhD?