Understanding even basic economic principles can be tricky, and understanding opportunity cost is no different. Most of the explanations found online aren’t that helpful because they are often overly complicated. And if you’re like most people, you need a clear understanding of your options and how they stack up against each other – and you don’t have a ton of time to spend grappling with what should be a relatively simple concept.
In fact, economics is fairly simple. Economists tend to overcomplicate it with buzzwords and other jargon. So, in plain words, here is an explanation of the opportunity cost of attending college.
- What is opportunity cost ?
- Why high school graduates choose to go to college?
- What does opportunity cost have to do with college?
- What could you do with that college tuition money instead?
- What is the opportunity cost of earning a college degree?
- What is the opportunity cost of earning an advanced college degree?
- FAQs
- For more on the opportunity cost of going to college, read these related stories…
What is opportunity cost ?
So there’s something you’d like to do. You know it’s going to take money and time. You can think of “opportunity cost” as the next best thing you could do with all that money and time. In this case, the opportunity cost of the project you want to take on is the money and time you’ll spend on it, plus whatever money, time, and enjoyment you’ll miss out on by not doing something else instead.
So, the opportunity cost is simply a way of analyzing your available choices. Your time and money are limited resources. You can make one of several different choices, but if you’re like most people, you only have enough time and money for one choice. Choosing option A means missing the value that option B (or C or D) would provide. Therefore, opportunity cost is what you’re missing out on by making a choice.
Why is it so important? Why should some confusing economic principle matter to you? Because it’s the key to understanding your individual life choices – as well as choices made by the government concerning your tax dollars. Opportunity cost allows you to understand the effects different choices have on your life.
Why high school graduates choose to go to college?
College is a great way to prepare for a successful career by gaining knowledge, skills and experience that employers value. There are several reasons why many people choose to attend college instead of going straight into the workforce after high school.
Firstly, college education is essential in today’s job market as many employers now require candidates to have a degree. A college degree demonstrates that the graduate has developed skills, knowledge and discipline necessary to succeed in a chosen profession. Furthermore, attending college provides an opportunity to explore different fields of study and discover one’s passions, which leads to a better career fit and job satisfaction.
Secondly, college education provides an opportunity for personal growth and development. It challenges students to be critical thinkers while providing a platform where students can make friends, interact with diverse communities and learn life skills such as time management, problem-solving and leadership, among others. College environment prepares students for the different challenges they will face in their future and equips them with the necessary coping mechanisms.
Overall, college education is a fulfilling experience that goes beyond the classroom as it prepares students to become independent and navigate through life’s challenges. Attending college increases earnings potential and enhances job security, while also providing the opportunity to follow one’s dreams and passions.
What does opportunity cost have to do with college?
Most people tend to think of college as a necessary step that can provide them with an education that more or less guarantees them a successful life with a well-paying job. It’s part of the American Dream, after all. Right?
Not so fast. Just like any life decision , college carries an opportunity cost. When you go to college, you give up other things – in fact, in some cases, you might have to give up quite a lot. The opportunity cost of college is huge, and it will probably have a much bigger effect on you than you realize.
College costs a lot no matter how you look at it. Whichever college you choose, no one would argue that college tuition was “cheap.” In fact, it costs more than you probably think. Tuition is only one part of the cost; the true cost of college also includes any outside expenses plus the income you’re forgoing by going to school instead of work.
What could you do with that college tuition money instead?
If you didn’t go to college after receiving your high school diploma, could you work full time instead and save money to buy a car? If you’re going to college to study, say, photography, could you instead be learning in a hands-on environment under a professional photographer? The possibilities are endless. You could be on your way to becoming financially independent, rather than spending your time on school projects.
The essence of opportunity cost is what you choose to do versus what you choose not to do. You could spend a lot of money and time in college, sure. Or you could get an early start in your desired career, buy a car, and get started on the path to becoming stable and independent.
You can only be in one place at one time. When you choose to engage in one activity, you give up others. Now, you have your own ideas about what your best option is versus your next best option; so does everyone else. For one person, college might be option A while getting a job might be the next best option, option B. But for another person, working right out of high school might be option A while college is option B. Opportunity cost is subjective. You only have so much time and money to do things with, and you have your own opinions about what is desirable and what’s not.
What is the opportunity cost of earning a college degree?
The opportunity cost of earning a college degree is that you will incur costs, and miss out on earnings and other experience while attending. Think of all the costs you pay, the cost of tuition, any associated costs, those add up. At the same time you will miss out on any income, experience , and pleasure you may not be able to participate in while you choose to attend college. Some will pile on student debt to pay for their college courses. That debt will incur interest payments which are also an incremental implicit cost to be considered. This opportunity cost naturally varies from person to person, depending on what they would choose to do instead of attending college and how much value (monetary or otherwise) that endeavor holds for them. It is based on the principle that you have a limited amount of time and money to do what you want, so you have to make choices. It’s up to you to choose between two different options and the financial gains and other benefits they bring.
Opportunity cost applies to all of the choices you make, not just whether or not you go to college. It’s a great way to help you understand the effect one choice has over another in your life. It can also help you analyze the value of each choice.
For a fun way to demonstrate this concept, try this: pick something you currently do or spend money on, and find its opportunity cost. It might be attending college, or it might be anything from staying up too late or buying a new video game to buying a new car or getting married. Just choose any activity or expense, and find its monetary cost – then make a list of things you could be doing instead with that money and time. What would your next best option be? How much enjoyment are you missing out on by making the choice you made? Compare the two options and determine whether you chose the right one.
College is not an automatic, necessary step in everyone’s life. Think about the opportunity cost involved before making a decision.
What is the opportunity cost of earning an advanced college degree?
Just as with traditional higher education and standard college degree, the opportunity cost of earning an advanced college degree is the potential income and career advancement that could have been earned if one had not pursued the advanced degree and instead entered the workforce earlier. This includes the explicit cost of graduate tuition, living expenses, and lost income while attending graduate school, as well as the opportunity cost including potential income that could have been earned during the same time frame in the workforce. Additionally, the time and effort invested in obtaining the degree could have been used to develop skills or gain experience in a specific field.
We understand if you complete an Associate Degree or Bachelors Degree, as a necessity for getting the job you desire. With the advanced degree you layer in similar considerations. Some professional degrees or advanced degree are required to serve in some professions. Think of medicine and law, among others. But there are also many who choose to attend graduate school looking for a graduate degree, specifically some masters degree (for example Masters in Business Administration (MBA), primarily to boost their income potential. If you are doing so, the masters degree should be considered an investment and the value of any incremental lifetime earnings should be weighed against the incremental costs of earning that advanced degree.
It’s not a slam dunk that every advanced degree will be valuable, or even that advanced degrees from the most prestigious institutions are guaranteed to make up for their incremental costs. As a general rule, the higher the cost of getting the degree, the higher the incremental income required to make up for the costs and opportunity costs of getting that degree. A requirement that many degrees may not be able to achieve given the supply and demand for specific degree holders.
On July 18, 2021 the Wall Street Journal published a piece titled “‘Financially Hobbled for Life’: The Elite Master’s Degrees That Don’t Pay Off.” They illustrate the problem precisely. Here is an example of what they had to say:
“Recent film program graduates of Columbia University who took out federal student loans had a median debt of $181,000.
Yet two years after earning their master’s degrees, half of the borrowers were making less than $30,000 a year.”
Financially Hobbled for Life’: The Elite Master’s Degrees That Don’t Pay Off.
Pay attention to the economics if you want to understand your college worth. We hope that at some point the college board would require every school to disclose how their costs to students match up against their ability to deliver incremental income.
Some things to think about:
- Don’t pay college tuition just a badge of honor achieving a certain education level. Educational attainment should always be accompanied with a more useful purpose – changing the world is an admirable one, but earning higher compensation is also valid. It’s an expensive badge of honor otherwise.
- Don’t just accumulate college credit. Education statistics indicate that too many are attending for well beyond the four years required (of a Bachelor degree), and in many cases not completing the degree.You must complete your course and become a college graduate, or a high school graduate will earn more over their lifetime.
- Take advantage of student financial aid, such as a pell grant, scholarship, or any other method that helps you reduce the cost of attending college. The lower the cost paid by a college student, whether for a Bachelors degree, Advanced Degree or a Professional Degree, the higher the likelihood your future earnings will pay for them.
- Labor statistics indicate that employers are becoming more conscious of the college debt burden incurred by students when the basic requirement for employment is a college degree. We have seen a nation trend towards loosening the requirement, attracting high school graduate, community college graduates and apprentices. We expect this trend to continue.
FAQs
What is opportunity cost?
Opportunity cost refers to the potential benefits that are foregone when choosing one alternative over another. It is the cost of the next best alternative that you give up when making a decision.
How does opportunity cost work?
Opportunity cost works by considering the benefits that could have been gained from choosing a different option. It helps in determining the best course of action by comparing the costs and benefits of each alternative.
Can you give an example of opportunity cost?
Sure! Let’s say you have the option to either attend a college or start a new business. If you choose to attend college, the opportunity cost would be the potential profits and experience you could have gained from starting the business.
How do you calculate opportunity cost?
To calculate opportunity cost, you need to subtract the benefit or value of the chosen option from the benefit or value of the next best alternative. This helps in quantifying the potential benefits that are forgone.
What is the simple definition of opportunity cost?
Opportunity cost is the value or benefit of the alternative option that is given up when making a decision.
What is economic profit?
Economic profit is the total revenue minus the explicit and implicit costs of a business decision.
How does opportunity cost impact decision-making?
Opportunity cost helps in evaluating the profitability of different alternatives. By considering the potential benefits that could be gained, it aids in making informed decisions that maximize overall benefits.
Can you provide another example of opportunity cost?
Certainly! Let’s say you have the choice between launching a new product or expanding your existing product line. The opportunity cost in this case would be the potential profits and market share you could have gained from expanding the product line.
What is the concept of sunk cost?
Sunk cost refers to the money spent on a past decision or investment that cannot be recovered. It should not be considered when calculating opportunity cost as it is already incurred and cannot be changed.
How can calculating opportunity cost help in decision-making?
Calculating opportunity cost helps in comparing the potential benefits and drawbacks of different options. By considering the value of the next best alternative, it provides a clearer understanding of the potential gains and losses associated with each choice.
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Econ. Prof. Gamal Abdel-Ghany says
Hi Ms. Klazema,
Everything in your article was a great read although I am an Economist and a college/university Economics Prof., that you wrote against saying they; “tend to over-complicate Economics with buzzwords and other jargon. That is not the reason I am commenting here.
The reason I am commenting is that the start of your article was correct and went smoothly and easily to explain the concept, then I lost you when you wrote the statement;
“In short, the opportunity cost of attending college is the cost of tuition…”
This statement is not economically sound and goes against everything that you wrote before it to explain the concept of Opportunity Cost. In a nutshell, tuition is an Explicit cost to college (monetary cost paid from our pocket so to speak). Opportunity cost though in nature is an Implicit cost (implied cost that has to be taken into account to reach better decision). Please I suggest reviewing more to rewrite your article correcting it in this part. You are and will be confusing many who reference your article in many classes.
Econ. Prof. Abdel-Ghany
Leon Shivamber says
Prof. Abdel-Ghany
You are correct in that Tuition is an implicit cost for those attending college. But it can also be viewed as an opportunity cost if those funds could otherwise have been used elsewhere – for example investing in a business.
One of the biggest opportunity costs in attending college may be the foregone income.
Hope that explains the point further.
Hayden Hall says
College vs not going to college completely depends on the person and there aspirations. For me a four year college is pointless and too expensive so I will be going to a community college.
Leon Shivamber says
You are correct. The point is that each person has to find what works best for themselves. In many cases, it will be college, but community college, apprenticeships, vocation schools and other choices are also good decisions.