A stream of reader requests and news of a relative giving birth to a baby boy made me think about the costs of higher education. In my experience only retirement beats the level of anxiety induced in a parent than the thought of securing a sound higher education for their offspring. New research from evolutionary psychology suggests that this anxiety is well placed. After all, the common theme over the last two decades has been that a foreign higher education is a sure way to achieve a better wealth outcome in later life. Therefore higher education appeals to our primal need for security, by way of higher income. Thus, many seem to even go to the depths of incurring serious debt to fund education. Has all this effort paid off and will it pay off going forward?

In short the answer looking at the past has been an overwhelming “yes”. The future however, may not necessarily hold the same fortunes. I studied the data for international student fees across a range of popular higher education destinations in the English speaking world (term used extremely lightly). They include America, Australia, Canada, United Kingdom and New Zealand. Education and health care costs have been increasing at a far higher rate across the OECD countries in the last decade.

Over the last decade, the cost of attending the median university in one of the above mentioned countries has increased at 8% per year, or over 50% overall. However, in Rupee terms with a weakening currency, this translates to 14% per year and 70% overall. What these numbers mean is that, had you begun saving money in the year 2000 for your child to attend university in 2010, you would need to have achieved a return of nearly 14% after fees, taxes and inflation. This is a tall order under any market condition, let alone the tumultuous decade we have had. Most fund managers are happy if they can produce real returns of 3-4% over a ten year cycle.

Currently the median bachelors degree for an overseas student (in the countries mentioned previously) would set parents back $US 118,000 (including a measly amount for lodging and other expenses) over four years. These are big numbers for anyone. Some would argue that students can fund part of this through employment. This is a dangerous myth that has led many astray. Immigration rules in many countries limit employment at 20 hours during school semesters. At minimum wage (which is about what most students make), that would mean $US 10,200 (before taxes) per year (assuming 9 months of school, and 3 months of full time work).

Thus parents are still left with a rather large budget black hole. This situation is only set to get worse. The government balance sheets across most of the destination countries for higher education look terrible. They are under tremendous political pressure to get the countries out of the current economic crisis, without cutting back on services or face the wrath of a voter backlash. The patronising view making the corridors of power in these countries is that overseas students are ripe for the picking as a culture for higher learning dominates those societies. The next few years may see a material and substantial rise in the cost of education as a foreign student across many of these countries. America would be alone in trying to resist this temptation. The American approach to higher education has always been to view quality students as an asset, but that applies to a select few universities only.

A high, higher education expense has historically been justified on the grounds of higher earning potential upon graduation. A median degree, in many countries would also generally lead to some “median” opportunities upon graduation. Graduate wages in most of these OECD countries have been falling, in real (after taking into account inflation) terms. Wages in the so called “developed” world has been under siege for the last 10 years, driven by advances in technology and the accelerated trend to offshore most of the entry level opportunities that were available to graduates a few years ago. This is fast spreading to middle level white collar jobs, thus increasing the competition for a fewer opportunities, and diminished wages.

Data from the American Bureau of Labour Statistics indicate that the median wage of those with a bachelors degree fell, in real terms over the 10 years to 2008, showed no growth for those with a masters and only increased for those with Phd’s or similar professional qualifications (which includes doctors). And life does not seem to be too kind for those returning home either. The best graduate wages in Sri Lanka is around Rs. 80,000, and that too is available to a handful only. Against this backdrop of falling white collar wages across many nations, the financial return on education soon starts to come unstuck.

There are two exceptions to the above scenario. That can be found in the fortunes of graduates from the top 20 or so American universities and three British universities. The reason for this lies in their highly selective nature and excellent alumni relations capabilities of these institutions. Second, there are some professions which are immune from such misfortunes, namely medicine and a handful of highly specialised fields across a range of industries. The skill here (which is much easier said than done) is to try and pick the next trend and make sure the student actually enjoys the content. Technology in the late nineties and investment banking early in the new millennium are good examples.

At the 2007 Alvin Hansen Symposium on Public Policy at Harvard University, Jagdish Bhagwati (professor of Economics at Columbia University) and Alan Blinder (professor of Economics and Public Affairs at Princeton University, who also served on President Clinton's Council of Economic Advisers and as Vice-Chairman of the Federal Reserve) had an interesting take on the future of offshoring.

According to the speakers, there will be three kinds of jobs which will remain in high wage countries. First are low skilled blue collar jobs which can't be automated, such as garbage collection, gardening and food services. Second, are highly specialised white collar jobs such as medical practitioners, high net worth sales and specialised research. A third category of middle-wage jobs may also remain, subject to challenges from technology, including teaching and trades (plumbing, electricians etc.).
Everything in the middle will be in for a major readjustment post the current global recession. Countries set to benefit include India for the most part, China, countries in South East Asia and Sri Lanka (providing we get our peace time policy framework right).

What then is the best financial strategy to achieve higher education? If your offspring are following the local education curriculum, hope that their natural endeavours carry them to a local university.
As my wife keeps reminding me, her total university education cost her Rs. 145, when she graduated in 2006. The other billions came from the tax payers. Admissions are so competitive that anyone who gets through with a decent showing, and who have a command of English can secure scholarships for graduate studies at the best institutions around the world.

Do not confuse a quality higher education with migration. They are different questions with different outcomes. There are cheaper ways to migrate than paying for an education in the country of choice. These countries are unlikely to shut the door to migration, as it forms a vital economic policy tool with the local population ageing. If anything, migration intakes are set to rise over the next decade, but not necessarily using the same recipe as the past.

Seek scholarships and financial aid where ever possible. Whilst the best universities around the world are extremely competitive, very few pay outright for the privilege of attending them. There may be higher quality cheaper alternatives in Europe and India, whose medium of instruction is English. These may be better alternatives to lower rung colleges in the old English speaking world.

Avoid going into debt, especially at punitive rates, to finance an overseas education. The fear psychosis thus induced on a child can impact their overall experience of student life and stay with them well after graduation.

Lobby the government to set up more collaborative university partnerships in Sri Lanka itself. Institutions such as SLIT are good examples of what can be achieved with a proper partnership structure.
Am I then saying that there is no payoff in gaining higher education overseas? Of course not, because I have been a big beneficiary myself. But the payoff comes from the student life experience, not only the mastery of subject matter.

The most sensible approach to higher education should thus be measured through intangibles and not viewed entirely as a guaranteed future financial outcome. And as any investment decision in life, it is sensible to commit to something you can afford, without incurring a major strain on your life style.
Those seeking a wealth outcome from higher education may be disappointed by what the future holds.

The writer is an Investment Specialist based in Sydney, Australia. You can write to him at kajangak@gmail.com.