Is higher education an individual investment or public insurance?

"Gavin," says my investment broker, "have I got a deal for you? Sit down.  I can guarantee you an annuity return of $500,000 over the next 40 years.  All I need from you is $50,000."

"I don't have $50,000," says I.

"Then borrow it!" he shouts.

Should I do it?  If I borrowed $50,000 at an average interest rate of 6.8% over 10 years I'd end up repaying $100,000 to make my $500,000.  If you squint, it's almost like getting $400,000 for free.  Paid out at $12,500 a year it's an annual return on investment of 7.2%.

And he tells me it's guaranteed.  "What is it?" I ask.

"It's an education," he grins.

There's plenty of research to back this up.  A PriceWaterhouseCoopers report on behalf Universities UK in 2006 and another by the Washington-based College Board in 2007 indicate that graduates of higher education can earn anywhere from $400,000 to $1 million more, after tax and education loans are paid, than do those who start work with only a high-school qualification.

House prices average around 5.0% returns annually and are subject to nerve-shattering highs and lows over any 40 year period.  The stock exchange offers returns around 9.6% and bond markets offer 5.7%; both are famously erratic.

There is no other investment that offers the sorts of secure returns as will a quality education.  Even better, the returns accrue entirely to you based on your own effort.  They are easily transferrable anywhere in the world and beat any measure of exchange control or sudden government intervention.

Getting a degree puts you into good company and graduates are more likely to marry other graduates, doubling your potential earnings.

And in the UK students are rioting because they demand that this entre to wealth be handed to them for free.  To be uncharitable, the children of bankers – fresh from public bailouts – are demanding that taxpayers stump up more free money so that they can get ever richer.

How many cars will the average graduate buy over a 40-year period?  Each will cost considerably more than one year of studies ever will.

Yet this is to step over a more critical evaluation of what public funds should be for.  Most people believe that the state should be responsible for some level of education just as most people believe that people should buy their own cars.

A small subset of people will suffer a heart attack, a car accident or the theft of their valuables.  Replacing these is extremely expensive.  Insurance permits the many to put away savings which, collectively, can cover these adverse events that can randomly afflict anyone.

Investment, on the other hand, allows an individual to utilise their special talents in cash or ability, to invest in order to gain a personal advantage.

In insurance the benefits accrue to everyone in having a minimum safety net.  In investment the benefits accrue to the individual.

A basic level of education is public insurance since a person who is unemployable becomes a continuing social burden.  Benefits and medical services, which that person doesn't pay for, have to be covered by everyone else.

The more people who participate in insurance the cheaper the premiums for everyone.  This only works for higher education if everyone is equally likely to get a degree.  Not everyone will. 

If everyone did then the smartest and most able would still differentiate themselves with even higher education, like a $100,000 MBA.

If a basic education does not guarantee a basic income, or even a job at all, then we should demand that such education be improved to the point where it does.  Collective insurance can then permit everyone to gain that measure of education.

Higher education takes a person beyond mere employment and into the area where real wealth can be generated. 

You want it you pay for it yourself.