How ♋Might Warren Buffett Value an Ivy Leagu♔e Degree?

Warren Buffett revealed his secret to valuing all assets in the🍌 Berkshire Hathaway Annual Report from 2000 when he said "a bird in the hand is worth two in the bush.” But in order to fully complete the form♉ula, Buffett said that we must answer the following three questions:

1. How certain are you that there are indeed birds in the bush?
2. When will the birds emerge and how many will there be?
3. What is the risk-free 澳洲幸运5开奖号码历史查询:interest rate?

Once these questions are answered, you can figure out the maximum value of the birds in the bush and the number of birds in the hand. Of course, don't be literal in your application of Buffett's advice. "Think dollars,” he said.

According to Buffett, this law is immutable and applies to everything, including the purchase of farms, bonds, stocks, and lottery tickets. Buffett said to make sure to use the correct numbers when you use this formula.

In this article, in a very limited way, we use Buffett's advice to imperfectly compare attending an Ivy League university to its public and private contemporaries. By doing so, we try to answer the question: Is an Ivy League degree worth it?

What to Consider Before You Apply

Going to college is just like any other type of investment. There are a number of different factors you need to consider. And you need to weigh out the pros and the cons. This leads us to a discounted 澳洲幸运5开奖号码历史查询:cash flow model that requires four key inputs:

1. The price tag or the cost of the investment, which in this case is the cost of a four-year degree.
2. Current earnings, or the starting salary after receiving a four-year degree.
3. A 澳洲幸运5开奖号码历史查询:discount rate.
4. Growth rates.

Now let's crunch the numbers and see how they fit into Buffett's advice.

Work Out Your Tuition and Fees

Let’s first determine the total cost for a four-year education at public, private, and Ivy League institutions. We'll use a starting point of 2024-2025 tuition and fees and inflate them each year for four years by an average tuition 澳洲幸运5开奖号码历史查询:inflation rate to reach a total four-year cost.

In its 2024 report, the College Board reports that the average advertised tuition and fees for public (out-of-state) and private universities in the 2024-2025 academic year were $30,780 and $43,350, respectively. According to College Tuition Compare, the average Ivy League education cost students $64,690 for the 2023-2024 school year. The average annual tuition rate is 8%, according to FinAid.org.

We can use this information to inflate tuition and fees for fou🔴r years to arrive at a total cost for eac✨h of our collegiate buckets:

How Much Can You Make?

Our cash flow model depends on an earnings stream that can grow over time at a realistic rate, so you should determine how much you can expect to earn after graduation. Keep in mind, our hypothetical scholar won't graduate until 2028, so it we'll inflate the starting salary to 2028 expectations.

Payscale.com provides starting salaries for each of our collegiate buc⛦kets. The top three reported school salaries for each college category were averaged together to find the 2024 starting salaries. The results are as follows:

• Public: $98,467
• Private: $113,600
• Ivy League: $94,567

Now let's inflate these salaries to a 2028 figure. The average annual wage 澳洲幸运5开奖号码历史查询:growth rate from 1960 to 2024 was 6.19%. Since we are equating our college returns to long-term investment, this is an ideal growth rate. In the following table, the starting salaries were increased by 6.19% a year🎀 for four years to arrive at a 2028 hypothetical starting salary.

The scholar who graduates in 20♚28 can expect to earn an average starting salary of $117,907, $136,027, or $113,238 for a public, private, or Ivy League education, respectively.

Quick Valuation Ratios

The information gathered so far can be used to determine the future value of the starting salaries and to calculate quick valuation ratios to calculate initial value indicators. These ratios are not necessary for our 澳洲幸运5开奖号码历史查询:discounted cash flow (DCF) model, but they do provide corroborating evidence to ﷽our eventual cash♔ flow model.

First, let’s estimate what each tier resulting salaries will be paid in 10 years. The following table shows the starting salaries for each tier projected forward ten years, using the 澳洲幸运5开奖号码历史查询:time value of money (TVM) calculation for future value and 🐬the 6.19% annual growth rate.

According to these projections, a college grad from a public university can expect to make $179,526 by 2034, while a private university grad and Ivy Leaဣgue grad can expect to make $207,116 and $172,415, respectively.

The🌌se sa♉lary calculations put into place some quick valuation ratios:

You can see that going to a public university comes out as a clear winn𝕴er if we consider the ratio of cost to 2ౠ024 starting salary compared to the other two options. The public tier drops even further to a mere 0.77 for the cost-to-2034-projected-salary ratio compared to .94 and 1.83 for private and Ivy League institutions. The lower, the better. So, a public school education clearly offers greater value than its rivals.

The Discounted Cash Flow Model

Now let’s move on to our DCF model, which♎ is truly the point of this exercise. Remember, the following inputs are necessa🌺ry to build the model:

1. The cost of a four-year degree.
2. The starting salary after receiving a four-year degree.
3. A discount rate.
4. 澳洲幸运5开奖号码历史查询:Growth rates.

We have already determined the total 2024-2025 to 2027-2028 tuition and fees (cost) for attending each tier, and we determined the starting salaries for each. Now, let’sღ decide on a discount rate and growth rates.

The Discount Rate

The discount rate is the rate used to discount future earnings back to a present-day dollar figure. It will be a combination of the 30-year 澳洲幸运5开奖号码历史查询:Treasury Bill (T-Bill) rate and an 澳洲幸运5开奖号码历史查询:equity risk premium (EPR). The reasoning behind this is that ﷽the 30-year T-Bill rate is what an individual investor can expect to gain in return (risk-free) if the money to attend college was invested instead.

The equity risk premium reflects the uncertainty over what the future salary will be. The 30-year T-Bill is 4.60% as of November 2024, while the equity risk premium is 4.04%. The total discount rate will, therefore, be 4.04%.

First and Second Stage Growth Rates

The growth rates will be the rates used to grow the starting salaries to a future value. As noted above, the average annual wage growth rate between 1960 to 2024 was 6.19%. This figure will be used for both the first- and secꦜond-stage growth rates.

A more short-term scientific analysis could be used to determine what the growth rate will be in the near term, but when it comes to 澳洲幸运5开奖号码历史查询:forecasting, take the weight of a decades-long average over a short🦹-term guess.

Summary of Inputs

ജ The inputs for our discounted cash flow model are as follows:

The Results

We arrive at the following results using t꧅he inputs listed above, including the discount rate and time value of money:

The ultimate goal is to arrive at a singular present value dollar figure (the figurative bird in the bush) that can be compared to other present value figures for other collegiate tiers and used to determine a 澳洲幸运5开奖号码历史查询:rate of return (RoR) based on the initial investment or, in our case, the four-year tuition🌼 and fees for a degree. The mode🐭l takes the starting salaries, projects them forward to a future value based on the growth rate, then discounts these future earnings back to a present-day dollar value using the discount rate.

From the results, a winner emerges: private schools have a 澳洲幸运5开奖号码历史查询:net present value (NPV) of approximately $1,078,122 compared to $965,123 and $745,282 for public and Ivy League schools respectively. In relation to costs, public schools are the winner: they deliver ꦜabout a 596% r𒊎eturn compared to 452% for private and 137% for Ivy League schools, respectively.

The Bottom Line

Is an Ivy League education worth it? If you only look at what graduates earn, then no, it's not, according to our discounted cash flow model. According to this model, you're much better off, value-wise, attending a public school, where your rate of return is the highest.

Of course, this analysis is imperfect. We've made many assumptions. Plus, our model isn't validated. We don't know the salaries of graduates a decade after they graduated. And the top three public colleges by starting salary—United States Naval Academy, United States Military Academy, and United States Air Force Academy—aren't relevant for many students, as they're military schools. Also, it's possible that the Ivy League new graduate salary average is lower because many Ivy League students from wealthy families can afford to pursue lower-paid roles right after graduating—and then, after a few years, they transition into more lucrative careers, such as 澳洲幸运5开奖号码历史查询:investment banking, 澳洲幸运5开奖号码历史查询:management consultꦆing, ﷽or private equity. That reality isn't accounted foꦜr by this model.

In any case, according to this model, we now know how many birds are in the bush. Based on this, a soon-to-be-scꦫholar will be much better served value-wise by picking the shrub labeled public. And, of course, don’t literally think birds and bushes. Think of dollars—and where you want to go to college.